The Strategic Audit


1. Identify current strategy.
2. Evaluate current performance.
3. Perform external audit (positive and negative factors external to the company).
4. Perform internal audit (positive and negative factors internal to the company).
5. Summarize critical issues.
6. Formulate new or modified strategic alternatives.
7. Develop specific strategic recommendations.

Important: Step #6’s strategic alternatives should respond to Step #5’s critical issues; and the specific recommended strategies presented and argued for in Step #7 should be chosen from the broader list of alternatives developed in Step #6. Your analysis should focus on these final three steps.
Professors H. Kent Bowen and Robert S. Huckman and Global Research Group Executive Director Carin-Isabel Knoop prepared this case. HBS
cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
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New Balance Athletic Shoe, Inc.
On a pleasant August evening in 2005, Jim and Anne Davis enjoyed what was meant to be a
relaxing dinner at home. As they finished their meal, however, they could not help but turn their
attention to a headline in that morning’s Boston Globe, a copy of which sat on their kitchen table:
“Adidas to buy Reebok.” For over 30 years, the Davises had been the sole owners of New Balance
Athletic Shoe, Inc., one of the top five producers of athletic footwear in the world. Given their
experience in the industry, they had suspected for some time that an Adidas-Reebok transaction
might be in the works. Nevertheless, the formal announcement caused them to wonder about the
implications of this deal for New Balance. By bringing together Adidas and Reebok—the second- and
third-largest producers of athletic footwear, respectively—this transaction would create a juggernaut
that would rival Nike, the largest competitor in the industry. Although the Davises did not have to
answer to Wall Street concerning their competitive plans, they knew that many in the industry—
including their own employees—would soon be asking for their response.
Over the past year, the Davises had focused significant attention on an initiative called New
Balance Executional Excellence (NB2E), the goal of which was to increase the quality and efficiency of
the company’s operational processes through the application of lean manufacturing. NB2E already
had provided evidence of improvement, and the Davises did not want to lose the growing
enthusiasm for this initiative among New Balance’s 2,600 associates. Further, they realized the
importance of staying true to the private company’s unique operating philosophy, strategy, culture,
and history. Nonetheless, they could not help but wonder whether New Balance’s priorities needed
to be adjusted in light of the shifting competitive landscape.
The U.S. Athletic Shoe Industry*
The United States was the world’s largest market for athletic shoes and apparel, accounting for
roughly 50% of the $32 billion spent globally each year. Between 2004 and 2009, the number of pairs
of athletic footwear sold in the United States was expected to grow at a 6.3% annual growth rate
(8.4% growth among women who accounted for 58% of all pairs purchased), reaching 530 million
pairs in 2009. Industry trade group Sporting Goods Intelligence projected that the $9 billion brandedshoe
market in the United States would grow by 8% in 2005. Growth was slowing in part because of a
maturation of consumer interest in sports and fitness activities.
* Drawn from “Industry Overview: Freedonia Focus On Athletic Footwear,” The Fredonia Group, April 1, 2005, available on, accessed on February 10, 2006.
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In response, manufacturers had moved to combine fashion and comfort to appeal to a broader
range of consumers, namely those who wore athletic shoes for casual purposes. Concurrently, a
combination of technological developments and style improvements in athletic footwear helped drive
Nike maintained a comfortable lead with 43% of the total global market for athletic shoes and
apparel (see Exhibit 1). Within the U.S. footwear market, Nike accounted for 36% of the market,
while Adidas, Reebok and New Balance each held a variable 8%-12% share of the market (Exhibit 2).
The Appendix briefly describes each of the top competitors in the industry.
The acquisition of Reebok by Adidas would create a firm that rivaled Nike in size and would
boost Adidas’s share to roughly 20% of the U.S. footwear market. The Adidas-Reebok transaction
would also reflect the broader trend toward consolidation in the athletic footwear industry. In July
2003, Nike acquired Converse, a Massachusetts-based manufacturer of court and casual shoes, for
$305 million. In June 2005, Stride Rite—the maker of casual footwear brands Keds and Sperry Top
Sider—announced its intention to acquire Saucony, a $170 million manufacturer of specialty running
shoes and apparel based in Peabody, Massachusetts.
With respect to worldwide marketing, Nike spent $213 million in measured media in 2004,
compared to Adidas’ $89 million and Reebok’s $42 million.1 In contrast, New Balance’s total
advertising expenditure was $17.3 million for the first 10 months of 2005.2 For all companies, most of
this expenditure was geared toward the marketing of footwear brands in the United States (Exhibit
Unlike New Balance, most leading competitors produced their shoes outside of the United States,
largely because the manufacturing of athletic footwear was highly labor intensive and required
relatively low levels of worker skill. China was the largest manufacturer of athletic footwear for the
U.S. market, commanding 85% of the category.3 The U.S. trade deficit in shoes had increased about
7% per year since 1999, reaching 379 million pairs in 2004. The deficit was expected to continue to
deepen, as more manufacturers shifted production offshore. Overall, Americans purchased 2.2 billion
pairs of shoes and boots in 2004, enough to give each man, woman and child in the U.S. 7.7 new
footwear options that year.4
Distribution Channels
In 2005, the American sneaker market was divided into several discrete retail channels catering to
periodically overlapping demographics that defined themselves by distinctive tastes, buying
patterns, and price elasticity. Foremost among these were the “big box” chains such as Wal-Mart,
Target, and Sears which together sold an estimated $12 billion in athletic apparel and equipment each
year.5 The second-largest group by sales volume included national sellers of sports shoes and apparel
such as Foot Locker, The Sports Authority, Finish Line, and The Athlete’s Foot. Next were smaller
urban chains that maintained strong ties to tastemakers and arbiters of fashion. These chains typically
either sold brands at heavy discounts to younger consumers or catered to high-end customers with
very specific needs (e.g., high-performance running). The leading sneaker manufacturers, such as
Nike and Adidas, also maintained showcase stores that featured new products in lavish displays
accompanied by TV screens and music. These branded outlets were less retail stores than museums
to the sneakers of tomorrow and the “classics” made legendary by the likes of Pelé, Chuck Taylor,
and Michael Jordan.
With 4,000 stores around the world, Foot Locker was widely recognized as the world’s leading
retailer of athletic shoes and apparel. Foot Locker contributed slightly less than 10% to Nike’s annual
sales, but Nike products represented as much as 50% of sales for Foot Locker. The Sports Authority
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had 400 U.S. stores, but maintained a broader product base, selling workout equipment, basketball
gear, sneakers and sports apparel. Finally, with 598 stores in the United Sates, Finish Line, originally
started in the early 1980s as a discounter whose primary business was in “closeout” sales, prided
itself in offering prices that were typically $5 less than other retailers.
Although beholden to the vagaries of fashion and manufacturers’ ability to design hit products
that would drive traffic into their stores, larger retailers held a great deal of sway over the fortunes of
the sneaker companies. For example, even though Converse sneakers were sold through many retail
and on-line outlets nationwide, Foot Locker accounted for roughly 20% of all Converse sales. Any
decision by Foot Locker about Converse’s product placement thus could have a material impact on
the brand’s sales. In another case, a 2003 dispute over promotional practices for Nike shoes caused a
costly one-year rift between the manufacturer and Foot Locker.
The Making of New Balance
New Balance was founded in Boston in 1906 as New Balance Arch6 by William J. Riley, a 33-yearold
British émigré who committed himself to helping people with problem feet by making arch
supports and prescription footwear to improve shoe fit. In 1934, Riley went into partnership with his
leading salesman, Arthur Hall. In 1954, Arthur Hall sold the business to his daughter and son-in-law,
Eleanor and Paul Kidd. Arch supports and prescription footwear remained the cornerstone of the
business until 1961, when the Kidds launched The Trackster, the world’s first performance running
shoe made with a ripple sole and available in multiple widths.
During the 1960s, New Balance’s reputation for manufacturing innovative performance footwear
available in multiple widths grew through word of mouth and grassroots promotions. When Jim
Davis bought the specialized shoe manufacturer from the Kidds on the day of the 1972 Boston
Marathon, he committed himself to uphold the company’s founding values of fit, performance, and
manufacturing. He recalled:
I wanted to buy a company, I was young and single. I didn’t have anything, so I had
nothing to lose. I looked at it a year before I bought it. At the time, I was in electronics. I
passed, because I knew nothing about footwear and not much about sporting goods, other
than what I knew from doing sports in college. I got a pair of the shoes, started running in
them, and people would come up to me and comment that I must be a good runner. Unable to
put a deal together in electronics, with the company still available, I went back, and the guy
was desperate to sell it. We paid $100,000 for the company; we put $10,000 down, and the rest
of the $90,000 was generated from lowering inventory.
At the time, New Balance was primarily a mail-order business with only a handful of U.S.
retailers. Jim Davis started traveling the country to expand retail distribution, and sales grew from
$100,000 to around $300,000 over a two-year period. Anne, who would marry Jim in 1984, joined New
Balance in 1978 and focused on building a distinct culture for New Balance associates and those who
would do business with the company around the globe. Indeed, New Balance’s first international
sales office and first European manufacturing facility both opened in 1978 in Europe. Since then the
brand had expanded from Europe and Asia to the Middle East, Latin America, and Africa.
In the early 1980s, New Balance set up new manufacturing facilities in New England and signed
on international distributors. In 1982, the company reached $60 million in sales and debuted the wellreceived
990 running shoe, the first athletic shoe priced at $100.7 At the time, athletic shoes retailed for
about $50. “People said we were nuts,” Jim mused, “but we couldn’t make them fast enough. People
learned from that and became more confident in pushing the envelope.” As of 2005, the 990 series
still represented the top selling product for New Balance, accounting for roughly 3.5% of the
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company’s sales. In the 1990s, the company unveiled its New Balance Suspension System to telegraph
its emphasis on cutting-edge R&D and its dedication to meeting the needs of performance-oriented
runners. The company’s commitment to multiple sneaker widths remained a selling point that was
reflected in the brand’s iconic marketing logo of three differently sized feet.8
Being Different
Herb Spivak, Executive Vice President of Operations and a 12-year veteran of the company,
explained New Balance’s unique features:
Our values have been very, very consistent and reinforced continuously by Jim and Anne
Davis. We do not endorse athletes. We aim to make every one of our shoes a performance
product as opposed to just a fashion product. We sell every shoe that we make in multiple
widths, because we believe that fit is a critical performance characteristic. We maintain a great
percentage of our product in inventory for replenishment, so that dealers can continually get
fill-ins when they sell and when they need certain sizes and widths. In contrast, competitors
pretty much tell retailers, “OK, tell us six months in advance what you’re going to want to buy
and we’ll deliver it. But it’s fixed, and we don’t plan on having future inventory.” These basic
factors, combined with our domestic factories, describe what makes us unique.
Because the company had remained private, Jim Davis felt that he and his colleagues could act
more nimbly and be more socially responsible than their larger and wealthier competitors. “If we
were a public company, I am sure the shareholders would say, ‘Close your factories and make the
product abroad because you will make more dough for me and my quarterly dividend,’” Davis told
The Boston Globe in 2004.9 Davis also felt that the company had products capable of providing solid
margins needed to generate the cash flow required to finance growth. As such, the company’s
balance sheet remained very strong, with a seven-to-one ratio of assets to liabilities.
Beyond financial flexibility, other aspects of the company’s operations and strategy suggested that
it was somehow different from competitors. President and Chief Operating Officer Jim Tompkins
One thing that sets us apart is that we are manufacturers. But we are mediocre marketers by
design. Our marketing spend as a percent of net revenue is much lower than our competitors.
The message that we talk about in the marketplace is different from our competitors’ message.
And that’s what makes the company unique—it is that we are manufacturing- and operationsbased,
not marketing-based.
Jim Davis emphasized this distinction:
In the early to mid-1980s, Nike and Reebok were both becoming major players, and
everybody said, “You ought to really do this because Nike and Reebok are doing it.” Well, we
tried a couple times with product and programs, and we failed, drastically. So then I woke up
one morning and I said, “We’re not any good at that. We’re really good at this.” So we
concentrated on doing this instead of that, and thus differentiated ourselves.
Like its unique business model, New Balance’s corporate culture developed over time. Teamwork
was a critical component. “When you’re young and starting up,” Jim Davis recalled, “you don’t really
think in terms of a culture. You just sort of do things a certain way. One day we realized that we were
very team-oriented and that we empower people. When we got to a certain size and maturity, we
New Balance Athletic Shoe, Inc. 606-094
realized that that’s basically what we were all about.” Further, New Balance developed a
longstanding commitment to social responsibility that, according to Anne Davis, “made people feel
good about dealing with the company.” For example, after the 2004 Asian tsunami, New Balance
declared that it would match whatever its associates donated. Then retailers wanted to participate, so
New Balance decided to match their contributions for a total contribution of $1 million. The company
also promised to donate another $1 million if 100% participation was reached among associates. In
the end, every person in the organization contributed something.
The company’s culture was also very entrepreneurial, starting with the owners’ willingness to
take risks and encourage others to do the same. Anne emphasized that this culture of change and
challenge extended to the factory, noting that manufacturing employees, mostly organized in crossfunctional
teams, represented one of the greatest forces for change in the company. This spirit was
also seen in New Balance’s senior managers. Chief Financial Officer John Withee observed,
“continuous improvement is a mantra here. Do the best you can, work cross-functionally, and work
towards a common goal.”
Endorsed By No OneTM
In an industry dominated by endorsement deals and large print and TV campaigns featuring
celebrity athletes, New Balance put its energies and investment into research, design, and domestic
manufacturing, and let the resulting products speak for themselves. New Balance felt it could eschew
celebrity endorsements and position itself as a brand for performance-oriented runners less swayed
by fashion trends and popular personalities. Despite a U.S. market share of just 3%, New Balance
extended its product-focused strategy to its branding efforts in 1992 with its “Endorsed by No OneTM”
New Balance introduced edgier iterations of the campaign, culminating with an anti-endorsement
ad that actually chided professional athletes for losing sight of the game and focusing
disproportionately on endorsement deals. With slightly older core customers (between 25 and 49),
New Balance concluded it could afford to take this irreverent tone. The “For Love or Money”
campaign was unveiled in February 2005.11 The slogan felt “natural to us because it was something
that only New Balance can stand in front of,” said Paul Heffernan, Executive Vice President of Global
Marketing. “It’s all about everyday athletes playing for the love of the game.”12 By contrast, Reebok
introduced a new ad campaign of its own that same month featuring basketball icon Yao Ming,
Olympic gold medalist Kelly Holmes, actress Lucy Liu, and tennis player Andy Roddick.13
The New Balance campaign featured a young basketball player admonishing “some of the pros
out there,” for their swagger and potentially unsportsmanlike conduct on and off the court. A gameending
brawl during a Detroit Pistons game in Auburn Hills, Michigan, on November 19, 2004 had
erupted after Indiana Pacers forward Ron Artest leapt into the stands to retaliate against a spectator
who had lobbed a cup of beer at players. The New Balance campaign took a direct approach with an
unassailable jibe: “Is fighting in sports ever justified?”14
In addition to 30-second TV spots, the campaign included print, billboard, and online ads that
posed a series of questions about athletes’—and by extension, their fans’—core values: “Can a losing
coach still be a good coach?” and “Which teaches a player more, winning or losing?” Yet another
New Balance ad from the same series was even more direct and confrontational: “Just in case you
forgot, this is what a pass looks like. . . . This is what a floor burn looks like.” New Balance was
reportedly planning to spend $21 million on its 2006 advertising campaign, almost its entire
promotional budget for the year.15
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Product Design
According to Heffernan, New Balance’s focus on width sizing and fit had historically dictated the
design of many of its products:
A 15-year-old who wants a pair of Nike Air Jordans might curl his toes or put on six pairs
of socks to make that shoe fit. In that case, purchases are made based on how a shoe looks
rather than whether it really fits well. The market that is interested in width sizing and fit is a
little bit older and more mature; those customers demand a product that is a bit more
conservative in its presentation and style. They tend to like a product and buy it again and
again and again. It’s like a white button-down shirt. I own a white button-down, it wears out,
I buy another white button-down.
New Balance had approximately 60 people in product design and development who were
involved with efforts on two fronts. One was incremental development of existing models. The
second involved the incorporation of new technologies such as Absorb EX—a premium, visiblecushioning
technology—and Zip, a patented responsive-cushioning technology scheduled to debut in
2006. Both technologies were oriented toward a younger customer base.
Despite New Balance’s desire for long-lived products, Heffernan knew that the company had to
remain capable of delivering products to the shorter-cycle, fashion-oriented segments of the market.
He noted:
The 991 series–our franchise shoe of 25 years—stays in line three years. With three years to
update that shoe, we can afford to take our time and be more thoughtful. But the more fashionoriented
products often need to churn every 60 to 90 days, which creates a completely different
model for product design. The fashion segment cares less about widths and more about time to
market, so we need to work under tighter timelines for these products.
Jim Davis felt that in the past five or six years, New Balance had “dropped the ball in a few places,
and design is one of them.” He added:
Right now, we are emphasizing design more than we have in the past and are raising the
level and stature of design within the organization. Design is going to become more important
as time goes on, a much larger factor than it has been. We tend to be a little bit more
conservative with design than our competition and stay within a certain realm for a relatively
long period of time. Then we find that we might have hit a wall, so we have to come back and
reinvent ourselves a little bit and move forward. The manufacturing folks do that every day.
The rest of the company is playing catch-up there, and we have to reinvent ourselves a little bit
more often than we have in the past.
Sales and Distribution
New Balance historically focused its sales and distribution activities on smaller retailers, running
specialty shops, and family footwear shops. John Withee explained, “We are heavily focused on
supporting the smaller type of service-oriented customer.” New Balance sold its products through
approximately 3,500 retailers representing over 12,000 sites, commonly referred to as “doors.” Its
largest retail customer was Foot Locker, a major chain that, on its own, accounted for over 3,000
doors in the United States. New Balance divided its retailers into two groups—key accounts and
specialty dealers (see Exhibit 3). Key accounts were further divided into six strategic accounts and 49
other key accounts. Specialty retailers were subdivided into three major channels: elite running stores
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(specialty stores for serious runners); independently owned and operated New Balance stores; and
other independent dealers (primarily family shoe stores).
Fran Allen, Executive Vice President for Sales and Service, noted that strong relationships with
both small and large retailers were critical for New Balance. “The importance of independent,
specialty retailers to the image of our brand far exceeds their 25% share of our sales volume.
Obviously, large accounts are extremely important in terms of their sales volume. Consequently, we
give both groups a lot of attention and work hard to give each what they need to be successful.”
In contrast to competitors, New Balance relied on a sales force that was composed of independent
agents. Allen noted, “In the sporting goods industry there is an unwritten rule—or maybe it is just
natural selection—that as you get to a certain point in sales volume, you grow out of an independent
sales force. You bring the sales organization in house. At New Balance, we do not have any in-house
accounts. We prefer using independent, dedicated sales agencies with an entrepreneurial mindset.”
All of the company’s sales agents were independent of—but exclusive to—New Balance. All were
compensated through a sales-based commission. Under this system, new salespeople might earn
$40,000 to $50,000 per year (from which they would cover their own expenses) while the most
experienced salespeople could make several hundred thousand per year. Large retail accounts were
managed by a total of 10 head sales agents, six of whom were strategic account managers (SAMs).
Specialty accounts were managed by approximately 100 agents, who worked for independent sales
agencies but were managed by five regional managers employed by New Balance (see Exhibit 4).
Despite the fact that these agents were not direct employees of New Balance, Allen—who had
been with New Balance 15 years as sales manager—noted that the company was not concerned about
these relationships that were unique to the industry. “We have a loyal group of salespeople, and their
longevity of service provides us with a distinct edge over our competitors,” he explained, attributing
this loyalty to the strength of New Balance’s leadership and culture. He added:
In 1991, my first year at New Balance, the company sold $84 million in footwear in the
United States; last year, we did a little over $1 billion. One of the reasons Jim Davis liked this
sales organization was that he had sales agents who had been with him for 15 or 20 years
before I got here and had stuck with the company through some difficult times.
For smaller, privately owned retailers, New Balance had historically paid an independent sales
representative to take product orders and either key them into the New Balance order system or fax
them to New Balance’s corporate sales office at company headquarters in Allston, Massachusetts. To
speed the ordering process, the company had recently invested in what Chief Financial Officer John
Withee termed a “state of the art” distribution center and was using technology to leverage this
resource, support its retailers, and strengthen its retail relationships.
A new sales force automation system enabled sales representatives to place direct orders
remotely, access New Balance’s inventory information, and check on delivery status. Another
application promised to enable retailers—particularly smaller retailers—to do the same without
intervention by the sales representative. Withee added, “This application helps manage the flow of
product through the supply chain and is about as vital as you can get in determining our
Going forward, Withee explained, the application would help retailers directly manage basic
ordering, thereby freeing up the sales representative to engage with the retailer and make
recommendations about new items to carry or options for reducing inventory levels. Jim Davis
explained the value proposition for retailers:
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If you’ve been selling New Balance shoes for the last 10 years, to sell 1,000 pairs you had
400 pairs in inventory. Assuming you are selling all domestic product, which some of our
accounts do, we would say: “We think we can increase your sales next year and lower your
inventory at the same time. We will ship to you the day after you order the product, so your
inventories can be decreased dramatically. Rather than carrying 400 pairs, you can carry 200
pairs, and sell maybe 1,200 pairs instead of 1,000. And your markdowns are negligible, because
your inventory’s so low.” And we think that’s a very compelling argument. We are taking all
the risk when we do that.
By shipping quickly and accurately, New Balance offered retailers the ability to build loyal
customers of their own. According to Jim Davis, New Balance already had far greater consumer
loyalty than any of its competitors. “That translates well for the retailer, especially if that retailer is
able to satisfy the customer with a 13EEEE foot size, because that customer always wants that size.
He or she will generally go back to that same retailer to get that product. And retailers know that.”
Supply Chain and Manufacturing
In contrast to Nike and Reebok, which outsourced nearly all of their production to Asian
manufacturers, New Balance used outsourcers for 75% of its U.S. volume. For the remaining 25%,
final product assembly took place in one of New Balance’s five factories in the northeastern United
States. One-third of these domestically assembled shoes were referred to as “cut-through-assembly”
product. For these shoes, New Balance imported finished soles and the raw materials for the upper
from Asian suppliers. The uppers were then fully manufactured and attached to the soles in the
United States. The remaining two thirds of New Balance’s domestic product was referred to as
“sourced-upper.” For sourced-upper shoes, New Balance imported finished uppers and soles from
Asia and completed the assembly by attaching the appropriately sized uppers and soles at its U.S.
factories. The more time intensive cut-through-assembly product was manufactured at New
Balance’s factories Lawrence, Massachusetts; Skowhegan, Maine; and Norridgewock, Maine.
Sourced-upper shoes were assembled at these three sites, and at another factory in Norway, Maine.*
(Exhibit 5 provides an overview of the manufacturing network and supply chain.)
Foreign Suppliers
New Balance sourced the soles for most of its shoes from two suppliers in China (suppliers A and
B in Exhibit 5). Depending on the shoe, these two firms also supplied either finished uppers or kits
containing a significant portion of the materials required to stitch uppers in the United States.†
Finally, these firms provided a limited amount of fully assembled shoes. These firms shipped to New
Balance’s three materials warehouses, two in Skowhegan, Maine, and one in Lawrence,
Historically, it took approximately one week for New Balance to place a purchase order for
components (e.g., soles, uppers, or kits) and have it accepted by the appropriate supplier in China. It
then took roughly six weeks for the supplier to manufacture the required components and an
* New Balance also had a small factory in Boston, Massachusetts, that manufactured roughly 500,000 pairs of shoes per year for
groups that needed particular types of footwear for various occupational uses. This factory completed all aspects of
production, including the manufacturing of soles.
† Typically, all materials except leather and certain mesh fabrics were sourced from these Chinese suppliers. For models
assembled in the United States, leather and mesh were sourced domestically.
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additional five weeks to ship them across the Pacific and transfer them for cross-country delivery to
the designated warehouse. Until the early 2000s, New Balance tended to place orders for a particular
sole on a monthly basis in batches as large as 20,000 pairs. For a single type of sole, each order
included roughly 20 different SKUs, reflecting different shoes lengths and widths.
John Wilson, Vice President for Manufacturing, noted that the company had taken several steps in
recent years to reduce the lead times from Asian suppliers. First, New Balance had shifted to placing
smaller orders of between 2,000 and 10,000 pairs on a weekly basis. In addition, New Balance made
arrangements with these suppliers to enable them to “pre-buy” their own raw materials on behalf of
the company, thereby reducing the lead time required to produce an order. These and other efforts
reduced the average time from placing a component order with a supplier to having those items
available at the New Balance materials warehouses from 12 weeks to approximately nine weeks.
New Balance also contracted with two other Chinese manufacturers for 75% of New Balance’s
foreign final product assembly. Though these firms shipped finished shoes to several of New
Balance’s smaller international divisions, most were shipped directly to New Balance’s product
distribution centers in Lawrence, Massachusetts and Ontario, California. The order-to-delivery lead
time was approximately 12 weeks and 10 weeks for shoes going to Lawrence and Ontario,
New Balance continued to forge closer partnerships with its suppliers, Jim Davis explained:
What we learn by doing things domestically, we share with our partners abroad. We are
focusing on lead-time optimization, asking them to go downstream two or three levels and
work with suppliers to react more quickly to us. In other words, we will share with them how
many shoes of a particular type that we are forecasting over the next few months so that they
can go back to their suppliers to let them know what their requirements are going to be.
Materials Warehousing, Manufacturing, and Distribution
As of August 2005, the three warehouses in Skowhegan and Lawrence held approximately $9
million—or 4.5 weeks—worth of raw materials inventory. For shoes that were assembled in the
United States, each of the five manufacturing plants placed orders for materials to these warehouses
for delivery by the next day.
Upon arriving at the factory, the materials were held in inventory briefly before moving to
production. Sourced-upper and cut-through-assembly shoes followed different flow paths through
the factory. (Exhibit 6 describes the standard production process for cut-through-assembly shoes.)
Industry experts estimated that the labor content for a pair of cut-through-assembly shoes was
approximately 25 minutes. In terms of manufacturing cost, labor and overhead each accounted for
roughly 25% of the total, while materials accounted for the remaining 50%. Estimates of the total cost
for a cut-through-assembly pair of shoes assembled in the United States was approximately $13
greater than a similar product fully manufactured in Asia. For sourced-upper pairs, this difference
was thought to be about $0.50, due to import duties placed on finished goods entering the United
In 2001, the average lead time for a cut-through-assembly batch (typically consisting of 12 pairs of
shoes) through a New Balance plant—measured from arrival of the raw materials to loading on the
truck as finished product—was roughly 8.5 days. By 2005, the company had reduced this time to 2.5
days through significant attention to process improvement and work-in-process reduction within the
plants. Wilson and his colleagues believed that further reductions in manufacturing lead time were
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Following production, domestically assembled pairs were transported via truck either directly to
the retailer (in the case of large strategic accounts) or to inventory in the Lawrence or Ontario
distribution centers. Each of those sites received and filled orders from smaller retailers. Combined,
these two distribution centers held roughly 6.4 million pairs of finished shoes.
The New Balance Workforce—A Key to Operations Improvement
The Davises believed that improving the production process at New Balance required widespread
initiative and involvement from the company’s front line workers. Before joining the New Balance
team, these manufacturing employees went through a lengthy selection process. New Balance
screened potential employees for their professional or personal experience in team-based
environments. For example, the company often looked for employees who had played team sports in
high school or college.
New hires were paired up with an experienced employee, known as a “buddy”, and were placed
in a training team for 6 to 8 weeks until they were comfortable enough to go on a regular production
team. “As soon as new employees come in, we train them in the foundations of associate
involvement, continuous improvement, and leadership,” Anne Davis explained, “but we don’t want
to put them immediately into an existing team and have them intimidated by the skills that the more
experienced members already have.”
The company’s U.S. workforce was not unionized. Some employees performed two or three jobs
on teams—a feature that would not be possible under a strict job classification system. “If one area of
the factory is slow and the other one is loaded up,” Anne Davis explained, “people willingly go to the
next area to make their numbers for the day, and we would not be able to do that if they were
unionized.” Added Jim Davis, “It’s a flexibility issue. The factories are always changing. The folks on
the factory floor are always pushing us to change things so they can do it better. We wouldn’t be able
to do that if we were unionized.” He added:
Annie and I are constantly amazed at how flexible these folks are, and how engaged they
are in what they’re doing. They go home, and they come to work the next day thinking, “How
can I do things better? How can I be more productive?” We’re trying to get the whole company
to think that way.
Beyond the team-based organization of the workforce, compensation also helped New Balance’s
management to leverage employee knowledge and initiative. A few years ago, New Balance briefly
moved from individual-based hourly wages to team-based piece rates, but then quickly moved back
to the hourly system. Jim Davis explained why:
Teammates put too much pressure on each other under the team-based compensation
system. If one person was out of work because she had a sick child at home, there would be too
much pressure on the rest of the team to perform, and she came in feeling guilty the next day.
So we have also a culture of mutual respect here, and we sat down with our supervisors and
we talked about how we might better accommodate these people, and one of the things that
we came up with was hourly pay. We did a pilot run for a month or so, and we found that the
production when we were compensating them on an hourly basis was equal to if not better
than under the team-based piecework system.
Anne Davis added that hourly compensation helped encourage workforce training. “Under the
team-based rate, many supervisors saw training as another project, as something that took their
people away from the job,” she said. “With hourly pay they were more willing to send people to
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New Balance Athletic Shoe, Inc. 606-094
training. And by doing training early on, people know right away whether or not they fit in the
Lean Manufacturing—New Balance Executional Excellence (NB2E)
In 2004, New Balance adopted New Balance Executional Excellence (NB2E) to apply the principles
of the Toyota Production System (TPS) to shoe production. One of the key goals of NB2E was to
further reduce the time between a retailer’s order and its delivery. Tompkins clearly stated his
objective for NB2E:
Our goal is 100% delivery of requested product within 24 hours. It may be impossible, but
we are going to work toward something very, very close to that—to a position where, for that
two or three percent that we can’t deliver within 24 hours—we can certainly replenish within,
say, four days at the most. And that would be only for the worst-case scenario where we got
completely surprised by an order.
According to Tompkins, an essential component of NB2E was moving the company’s
manufacturing plants from batch production to pair-by-pair flow. He added:
Over a period of time I would like to know that when a part of an upper gets cut to what
pair of shoes that part is heading… And we might be making several different models in a
given factory on a given day, but we would still know that that part right there and the one in
the other factory over there are going to end up in a shoe that is put on that trailer heading to
that customer. That is where I would like to get to.
Before NB2E, New Balance was required to resort to what Spivak called “brute force”—greatly
increasing finished goods inventory to improve product availability. For the company’s flagship
shoe, the 991, inventory was doubled to ensure availability for all colors, sizes, and widths. Though
there was a significant increase in sales of the 991, the inventory cost was very high.
If NB2E was to be successful—approaching Tompkins’ goal of 100% availability within 24 hours
while reducing inventory levels—manufacturing cycle times had to be dramatically reduced. These
changes required complete realignment of factory operations. Spivak observed:
Our factory had a classic arrangement, with cutting, embroidery, stitching, and assembly
departments. Each department did its particular tasks for all styles, and the factory worked on
a batch basis. To realign that under NB2E would require a big change. Instead of moving a
day’s worth of production, we needed to move toward a more continuous flow. Doing this
would require us to reduce work in process significantly and get the line associates and
supervisors to embrace that change. The real challenge would be to keep making shoes every
day while this transformation was ongoing.
The Marathon
Glimpsing the brilliant evening sun outside their kitchen window, the Davises could not imagine
a more fitting time for reflection. Though New Balance traditionally competed on the basis of its
manufacturing, service to retailers, and its ability to build loyalty among a core set of customers for
its high-margin, long-lived shoe models, 2005 had not been a stellar year mostly because of
operational issues. “We did a very poor job of executing in the first half of the year,” Jim Davis noted.
“We had a lot of quality problems, late deliveries, and late samples, which inhibited the effectiveness
of our salespeople.” To Davis, the answer was “basically doing everything we’ve always done before,
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606-094 New Balance Athletic Shoe, Inc.
only doing it better.” Yet as New Balance grew well beyond $1 billion in revenue, it was important to
consider the company’s scalability.
John Withee mirrored Davis’ concern:
New Balance is very good culturally at knocking down walls to get something done. But
then it’s easy to regret that. That may be why we have so many styles and so many SKUs.
Everyone’s trying to work harder. You try to do things efficiently and have the right type of
metrics, and all of a sudden it’s just too many balls to juggle. And there’s the balance of the
entrepreneurial—which is certainly a cultural thing here—and the fact that you wake up and
you haven’t got a good handle on your inventory. Your inventory is too high, the wrong color,
or on the wrong coast.
The confluence of so many opportunities and challenges forced the Davises to consider whether
and how to react to the Adidas-Reebok announcement. Did New Balance need to consider making its
own acquisitions? Did it need to consider reducing its level of domestic manufacturing? Did it need
to get better at the promotional tactics used by its competitors? Or should the company remain
focused on scaling its current business model and improving operational performance via the NB2E
initiative? Which option would provide New Balance with an acceptable level of future growth in
light of industry consolidation?
Jim Davis felt that the impact of the Adidas-Reebok transaction would be felt most by retailers, a
fact that would help New Balance. “Before this deal, the industry had one 800-pound gorilla; now
there are two. Those big guys tend to dictate a little bit, but they don’t move as quickly as a smaller
company, and they don’t really establish the partnerships that we do. We see this as a major
opportunity.” Davis noted that a major customer recently told New Balance that it planned on doing
more business with the company after the Adidas-Reebok merger, in part because it knew New
Balance—and its stable roster of salespeople and managers—so well.
Having finished their dinner, the Davises wondered what to have for dessert.
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New Balance Athletic Shoe, Inc. 606-094
Exhibit 1 Comparative Data on Major Athletic Footwear and Apparel Companies, 2004
Worldwide Sales
($ million)
($ million)
Total Assets
($ million)
Net Income
($ million) Employees
Nike, Inc. 13,739.7 7,299.7 8,793.6 1,211.6 26,000
Adidas-Salomon AG 8,057.0 3,384.0 6,015.8 402.3 17,023
Reebok International Ltd. 3,785.3 2,430.3 2,440.6 192.4 9,100
Puma 1,903.3 1,065.8 1,263.1 320.0 3,910
New Balance 1,500.0 NA NA NA 2,600
Asics 1,330.0 811.3 1,146.0 43.8 4,160
Fila USA 955.2 NA NA (85.0) 2,300
K-Swiss 508.6 508.6 336.2 75.2 480
Vans 330.2 NA NA (30.0) 1,890
Saucony 166.7 140.8 96.3 10.4 340
Source: Standard & Poor’s Research Insight, Hoover’s, BrandWeek, June 20, 2005, p. S53, (accessed
April 15, 2006).
Note: All figures are for 2004, except Vans (2003) and Fila USA (2002).
Exhibit 2 U.S. Athletic Footwear Sales and Media Expenditure by Brand, 2004
U.S Athletic Footwear Sales
($ million)
U.S. Athletic Footwear
Media Expenditure
($ million)
Brand Familiarity
Nike 3,225.0 134.1 88
Reebok 1,087.0 31.0 82
New Balance 1,022.0 10.9 58
Adidas 790.0 52.0 80
K-Swiss 395.0 29.0 41
Converse 305.0 3.9 66
Vans 240.0 4.6 27
Puma 209.0 6.2 54
Source: BrandWeek, June 20, 2005, p. S53.
Note: Excludes brands with athletic footwear sales less than $200 million. The total U.S. athletic footwear market was
estimated at $9 billion in sales in 2004.
Exhibit 3 New Balance Sales Summary
Number of
Number of
Total New Balance
Revenues ($000s)
Elite Running Stores 250 350 25,000
New Balance Stores 70 130 75,000
Other Independent Stores 3,100 3,500 150,000
Strategic Accounts 6 6,000 360,000
Other Key Accounts 49 3,000 450,000
Source: Company documents.
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Exhibit 4 Organizational Structure of New Balance’s Salesforce
Source: Company documents.
Fran Allen
Executive Vice President,
Sales and Service
David Shelbourne
Specialty Sales Manager
Peter Zappala
Vice President,
Sales.Key Accounts
Head Representatives,
Strategic Accounts (6)
Head Representatives,
Other Key Accounts (4)
Stanford Jennings
Regional Manager,
Steve Prince
Regional Manager,
Karen Fischer-Hannes
Regional Manager,
Earl Roberson
Regional Manager,
Jeff Antonioli
Regional Manager,
Representatives (20)
Representatives (20)
Representatives (20)
Representatives (20)
Representatives (20)
New Balance Employee
Independent, Exclusive to New Balance
Team Sports
Sales Manager
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Exhibit 5 New Balance Supply Chain
Source: Company documents.

Supplier A
. Soles
. Finished uppers
. Upper kits
. Finished shoes
Supplier B
. Soles
. Finished uppers
. Upper kits
. Finished shoes
Supplier C
. Finished shoes
Supplier D
. Finished shoes
Asian Suppliers
Skowhegan, ME
Skowhegan, ME
Lawrence, MA
Skowhegan, ME
Lawrence, MA
Lead Time (incl 1 week order time) =
7 weeks (circa 2001)
4 weeks (circa 2005)
Lead Time = 5 weeks
Lead Time =
8-9 days (circa 2001)
2-3 days (circa 2005)
Ontario, CA
Lead Time = 5 weeks
Lead Time = 3 weeks
Norway, ME
Lawrence, MA
Boston, MA
Lead Time (incl 1 week order time) =
7 weeks (circa 2001 and 2005)
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606-094 New Balance Athletic Shoe, Inc.
Exhibit 6 Standard Process for a “Cut-Through-Assembly” Conventional Shoe (Flat-Lasted
• Materials are received and inspected.
• Materials are webbed in the Webbing Dept. This consists of laying several layers of materials, face
to face, so when the pieces are cut, they become the left and right parts with one single cut.
• Webbed materials are sent to the Cutting Department where all the parts for all styles are cut.
• Some shoe parts are sent to the Radio Frequency machine for embossing and bonding of a
reinforcing material.
• Other shoe parts are sent to Embroidery, where the emblems are embroidered.
• All shoe parts are kept together in racks with cases of 12 pairs each in the Pre-Fit Department.
• The racks are sent to the Orisol Departments, where many shoe components are stitched together
in single pass. This has helped NB to reduce the cost per shoe.
• Some styles require the “N” stitched into each shoe, they are sent to the “N” department.
• All the above operations are done in the flat stage, the sewn parts are two-dimensional (2D).
Everything continues to travel in cases of 12 pairs and are sent to the Closing Department
• In the Closing Department, the shoe components begin to take the form of a shoe as the they are
being converted from flat shoe components to their 3D shape.
• From the closing department, the shoes are sent to the Upper-Prep Department. Here uppers,
soles and other shoe components are cased together.
• With all of the parts cased together they are sent to the Assembly Department. In this department,
the shoes are “Lasted”. Tasks in the lasting department consist of:
o Upper conditioning
o Slip lasting
o Toe Lasting
o Side/Heel Lasting
o Pounding, which is the act of sanding down any excess material under the shoes
o Washing or Priming as recommended by the Bonding Department
o Marking the periphery of the sole
o Cementing to the sole line
o Cement Drying
o Sole and Upper cement activation
o Sole Setting
o Sole Pressing
o Extracting the Last
o Inserting shoe insert
o Lacing the shoes
o Cleaning and/or repairing
o Inspecting
o Boxing the shoes in pairs and in cases of 12 pairs
Source: Company documents.
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New Balance Athletic Shoe, Inc. 606-094
Brief Overview of Main Competitors
Nike. Headquartered in Beaverton, Oregon and started with a handshake between two selfdescribed
running geeks in 1972, University of Oregon running coach Bill Bowerman and
entrepreneur Phil Knight. Nike was the leading supplier of athletic footwear to the U.S. market in
2004 and the largest marketer of athletic apparel in the world. In 2004, Nike’s sales exceeded $13.7
billion and it employed approximately 26,000 people in May 2005. U.S. footwear sales totaled
approximately $3.2 billion in 2004. That year, the company’s top-selling footwear product categories
were running, basketball, children’s, cross-training and women’s shoes. Although Nike focused
mainly on athletic shoes, it also offered dress and casual footwear through its Cole Haan subsidiary.16
Virtually all of its products were manufactured by independent contractors. Virtually all footwear
and apparel products were produced outside the United States, while equipment products were
produced both in the United States and abroad.
Reebok. Founded in 1895 and headquartered in Canton, Massachusetts, Reebok was the secondlargest
supplier of athletic footwear in the United States and produced athletic apparel and
accessories in addition to non-athletic, casual clothing and footwear. Reebok’s sales reached nearly
$3.8 billion in 2004, of which $2.1 billion was in the United States, and the company employed 9,100
people. Product lines marketed under the Reebok brand name included RBK, targeted at young,
fashion oriented consumers; Performance, designed for sport-specific activities and utilizing such
features as the Pump inflation technology; and Classic, products that included long-time consumer
footwear favorites.17 Like Nike, virtually all of its footwear was manufactured by independent
manufacturers outside of the United States. According to its 2004 annual report, the company
sourced some of its apparel and some of the component parts used in its footwear from independent
manufacturers located in the United States.
Adidas-Salomon. Headquartered in Herzogenaurach, Germany, Adidas-Salomon was the third
leading supplier of athletic footwear to the U.S. market in 2004 and also produced athletic clothing
and equipment. Its products were available in virtually every country in the world. Adidas-
Salomon’s 2004 sales totaled roughly $8 billion, of which North America accounted for $1.8 billion. In
an effort to build brand recognition in North America, Adidas had recently opened concept stores in
city centers, mirroring Nike’s approach of showcasing its products in glossy Niketown outlets. In
2004, the Adidas line of branded products accounted for $6.4 billion of sales and encompassed three
divisions: Sport Performance, focused on introducing innovative, technology-based products for
sport-specific activities; Sport Heritage, which offered classic style footwear for casual use; and Sport
Style, targeted at cosmopolitan consumers.
Others. Niche players such as Puma were making a strong push into lifestyle models. Also
headquartered in Herzogenaurach, Germany, Puma aspired an iconic brand that defined a culture it
called “Sportlifestyle.” In January 2005, the company partnered with Ferrari AG to become the official
licensee of replica and fan merchandise and supplier of Scuderia Ferrari Marlboro Formula 1 team.18
Founded by two Swiss brothers in California, K-Swiss introduced its “Classic” tennis shoe in 1966. In
2005, the company sold athletic, training, and children’s shoes, apparel, and accessories. K-Swiss sales
totaled $508.6 million in 2004; headcount was 480.19 Vans sold footwear and apparel for casual wear
and activities such as skateboarding, snowboarding, surfing, and bicycle motocross (BMX). VF
Corporation acquired Vans in 2004.20 Established in Japan in 1949 as Onitsuka Co., Ltd., Asics made
footwear, sportswear, uniforms, and accessories. In 2004, the company employed over 4,100 people
and totaled $1.3 billion in sales. Asics was an acronym of a Latin phrase meaning, “you should pray
to have a sound mind in a sound body.”21
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606-094 New Balance Athletic Shoe, Inc.
1 Rich Thomaselli, “Adidas Deal Sets Stage For Full-Scale War With Nike; Pooled Might Makes For Fairer
Match Up In Bid For Endorsements, Share,” Advertising Age, August 8, 2005, available on,
accessed on February 21, 2006.
2 Ibid.
3 Stephanie Nall, “Putting A Fashionable Foot Forward,” Pacific Shipper, September 23, 2005, available on, accessed on April 17, 2006.
4 Ibid.
5 “Doing The Math: Retail Top 100,” Sporting Goods Business, June 1, 2004, available on,
accessed on April 17, 2006.
6 Business Wire, “New Balance Achieves Its Centennial Year; Global Athletic Manufacturer Recognizes Past
Milestones and Looks to Innovative Future,” January 5, 2006, available on, accessed on March
1, 2006.
7 Ibid.
8 Ibid.
9 Steve Bailey, “Mom and Pop Billionaires,” The Boston Globe, October 6, 2004, available on,
accessed on March 1, 2006.
10 Joe Pereira, “New Balance Sneaker Ads Jab At Pro Athletes’ Pretensions,” The Wall Street Journal, March 10,
2005, available on, accessed on March 1, 2006.
11 Naomi Aoki, “New Balance’s Latest Ads Celebrate The Older Amateur,” The Boston Globe, February 28,
2005, available on, accessed on March 1, 2006.
12 Ibid.
13 Ibid.
14 Ibid.
15 Joe Pereira, “New Balance Sneaker Ads Jab At Pro Athletes’ Pretensions,” The Wall Street Journal, March 10,
2005, available on, accessed on March 1, 2006.
16 Fredonia report and Nike website,, accessed
February 10, 2006.
17 Ibid.
18 Puma website,, accessed March 3, 2006.
19 “K-Swiss Company Overview,” available from Hoover’s,, accessed March 3, 2006.
20 “Vans Company Overview,” available from Hoover’s,, accessed March 3, 2006.
21 Hoover’s report and Asics website,, accessed March 3, 2006.
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The Strategic Audit