Adidas Company

Adidas is the second largest manufacturer of sports products globally and was founded in 1949. It manufactures clothing, shoes and accessories. The company has grown over the years and as at 2017, its revenues were €21.218 billion. It has a global presence and hires over 56,000 employees (Dawes, 2018). However, there are many challenges facing Adidas and some of these include data breaches, moral hazard problems, adverse selection challenges, principal-agent problems and challenges with its organizational structure.  Unless Adidas addresses the challenges that it faces, then its brand image may be damaged compromised and competitors will take advantage of Adidas’ poor reputation and performance to dominate the sportswear market.  This paper seeks to evaluate each of these problems with regard to Adidas and develop a practical solution to mitigate the threats posed by each of the risks.  The knowledge developed will be instrumental in improving Adidas’ operations to enable it attain its long term goals. 

Adidas’ actions in dealing with data breach

According to Murdock (2018), Adidas warned its customers that its website could have been hacked and millions of encrypted passwords and usernames stolen by the hackers. The company issued the statement after a hacker reported to them that he had accessed data on Adidas customers. The company alerted millions of customers who had purchased products on its website so that they could implement mitigation measures to protect their personal data from being used illegally by the hackers. After Adidas became aware of the potential hacking, its first step was to conduct investigations so that it could be aware of the authenticity of the hacking claims and the potential impacts of the risk event it was facing. The second step was informing the customers of the breach, and this step was essential in risk mitigation. By informing the potential targets of the hacking, the company empowered them with information that they could use to minimize the potential harm they would experience if the hackers used their identities to commit criminal activities. For instance, they could use the identities to perpetuate online fraud through identity theft, or use this information to illegally gain access into financial records of the customers. 

Advice on risk management for Adidas

In addition to investigating and informing customers about the data breach, Adidas should take further measures to protect the integrity of its security systems. According to Conway and Cordingley (2014), to prevent hacking companies should update all their software. Moreover, they should tighten network security and use web firewalls among other security applications. Adidas should either rely on its in-house IT department for improving its IT security, or it should involve a third party such as a professional IT company with a proven track record in protecting large corporations. It should work with the IT-solutions team to identify potential risk areas that hackers have taken advantage of in the past and vulnerable areas where they can manipulate in the future.  Consequently, the company should implement measures that seal all loopholes to prevent future cases of data breach. Unless Adidas makes these changes, it will destroy its brand since consumers will not access its website for fear of hacking. Repeated data breaches destroy strong brands such as Adidas, and it is imperative that the company strengthens its IT security to prevent future breaches (Schatz & Bashroush, 2016)

Adverse selection problem for Adidas and recommendations

According to Finkelstein and Poterba (2004), an adverse selection problem is a situation where asymmetrical information possessed by one party affects market participation. Adidas faces this problem when dealing with counterfeit products especially in developing countries. Many buyers in these markets are not aware of the difference between genuine and counterfeit Adidas products. As a result, some genuine Adidas retailers collaborate with counterfeiters and sell counterfeits to consumers, but at the price of genuine Adidas products.  Over time, consumers in these markets stop purchasing Adidas products since they believe that the company produces low quality products, and the company sales decline.  

Adidas can resolve this problem by collaborating with governments in developing countries in fighting counterfeit products.  The company should be proactive in helping governments to nab counterfeiters who operate in its stores, to safeguard the integrity of its brand.  It should also educate consumers through awareness campaigns on how to differentiate between genuine Adidas products and counterfeits so that it may restore the integrity of its brand.  Adidas can develop electronic and internet advertisements that contain videos or images of counterfeit and genuine Adidas products so that consumers are empowered to make accurate purchase decisions when buying the company’s products. The company can also conduct random checks in its stores globally to ascertain that the products in stock are genuine Adidas products.

Moral hazard problem for Adidas and best practices to resolve it 

A moral hazard problem is a situation where a party exposes himself/herself to more risk with the understanding that someone else will cover such risk. Adidas has faced a moral hazard problem in outsourcing production activities in Asia. Many suppliers engage in unethical practices such as child labor and enforcing poor working conditions for workers in sweatshops, since they are aware that Adidas will be held responsible, as opposed to them (Hernandez, 2016). Consequently, the company has faced adverse publicity in the past, and some consumers have shunned Adidas products due to its poor human rights history. Unless the company addresses the problem, it may lose more potential clients in future and experience a decline in performance. 

To mitigate this problem, industry practices from established outsourcing companies such as Nike, have established that the parent company needs to hold overseas production plants responsible for their actions. Adidas should enforce strict supervision on its production plants in Asia by conducting random site visits and evaluating feedback on human rights groups on the work practices by its suppliers. It should terminate contracts with suppliers who violate any ethical or legal regulations that govern human resource management. Once the overseas suppliers understand that they will be held responsible for their unethical practices, they will not take the risk of violating employment laws or performing unethical acts on workers. 

Principal-agent problem and tools and incentives to improve profitability

This is a challenge facing corporations where an agent is allowed to make decisions on behalf of the principal, and the agent decides to pursue his/her individual interests at the expense of the corporate interest. An example is in the relationship between the corporate managers who act as agents for the shareholders who are the principals. If the management makes decisions that subvert the interests of the shareholders, then the principal-agent problem is deemed to have occurred. According to Pierson (2018) Adidas faced the principal-agent problem when a senior Adidas executive was found guilty in participating in a corruption scheme that defrauded the US College basketball body and Adidas-sponsored universities. The former global sports marketing head received a conviction for wire fraud for bribing college athletes to attend Adidas-sponsored universities.  

In this situation the Adidas executive is the agent and he works for the Adidas shareholders who are the principals. However, his unethical and illegal practices have adversely affected the principal and created a negative reputation for the Adidas brand. To mitigate this problem, Adidas should retrain employees on the corporate values and culture that Adidas stands for.  Its recruitment process and pre-job training should seek to identify and hire employees with integrity, and who share similar goals with the principal’s goals. Moreover, the company should terminate employment for workers engaged in unethical practices to send a message that it cannot condone such actions. Additionally, Adidas should apologize to the public and explain the steps it has implemented to prevent a similar incident, to safeguard its public image.

Adidas’ organizational structure and how it can be improved

Adidas has applied the centralized organizational structure where power is concentrated on the top hierarchies. It consists of the executive board which is assisted by three vice presidents in marketing, human resource and finance. Moreover, there are three other vice presidents that head divisions such as manufacturing, engineering and projects. Various teams of managers work with the latter group of vice presidents. One of the main weaknesses of a centralized structure is that it is rigid and slow in adapting to change. There are long bureaucratic processes which are involved in decision making from the top to the bottom levels of hierarchy. This is perhaps one of the reasons why Adidas has faced problems with its overseas manufacturing plants. Managers in these plants have performed unethical actions since they have not been held to account by the top management. To address the weaknesses of the centralized structure, Adidas should decentralize some of the powers to localized markets such as countries or regions. It should empower country or regional managers to make decisions that concern their unique markets where they operate. The top management should only be involved in making strategic decisions that affect the entire company. Through this, regional or national managers will have the power to implement decisions that will safeguard the goals of Adidas in a timely and efficient manner.  

Conclusion

In summary, Adidas faces many problems that are linked to its organizational structure, principal-agent relationships, moral hazards, adverse selection and risk management. It is important for the management to identify each of the risks that the company faces, its causes, and strategies that can mitigate such risks. For instance, the risk of data breach can be mitigated through implementing IT software and hardware that will prevent hackers from hacking the website in future.  In addition, the principal-agent relationship can be resolved through enforcing a culture of integrity and punishing employees who engage in unethical actions. The moral hazard problem can be addressed through enhancing supervision for overseas suppliers while the organizational structure challenge can be mitigated through empowering lower-level managers to make decisions regarding operations in the unique markets where they operate.  It is vital that the management involves all stakeholders when implementing these solutions so that they can support management initiatives seeking to improve the performance of Adidas. 

References

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Dawes, J. (2018). “Brand Loyalty in the UK Sportswear Market.” International Journal of 

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Finkelstein, A. & Poterba, J. (2004). “Adverse selection in insurance markets: policyholder 

evidence from the UK annuity market”. Journal of Political Economy. 112 (1): 183–208. doi:10.1086/379936.

Hernandez, I. (2016). Is it ethical to buy from Nike or Adidas? Retrieved from 

https://latinamericanpost.com/19417-is-it-ethical-to-buy-from-nike-or-adidas

Murdock, J. (2018). Adidas hack: ‘Millions’ of U.S. website customers warned of cyber theft. 

Retrieved from https://www.newsweek.com/adidas-breach-hack-us-website-customers-warned-their-data-has-been-hacked-1000974

Pierson, B. (2018). Ex-Adidas executive found guilty in U.S. college basketball bribery 

scheme. Retrieved from https://www.reuters.com/article/us-usa-crime-ncaa/ex-adidas-executive-found-guilty-in-u-s-college-basketball-bribery-scheme-idUSKCN1MY2RE

Schatz, D. & Bashroush, R. (2016). “The impact of repeated data breach events on 

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