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IBUS3101
ALLIANCE PROPOSAL
ICEBERG FOOTWEAR AND KRATOS
WORD COUNT: 2455
Cecilie Aase, June Ho, Shihan Jia, Mikaela Lui,
Gabrielle Royle, Isabella Tattam


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Table of Contents

Introduction ............................................................................................................................................ 3
Industry & Company Background ....................................................................................................... 3-5
Industry Background ........................................................................................................................... 3
Iceberg Footwear - Company Background.......................................................................................... 3
Kratos - Company Background ............................................................................................................ 4
Alliance Design Aspects ....................................................................................................................... 5-7
Alliance Value Creation Logic .............................................................................................................. 5
Alliance Goals ...................................................................................................................................... 6
Alliance Design Features ..................................................................................................................... 6
Future Opportunities .......................................................................................................................... 7
Alliance Management ......................................................................................................................... 7-9
Governance ......................................................................................................................................... 7
Risk Management ............................................................................................................................... 8
Alliance Performance .......................................................................................................................... 8
Conclusion ............................................................................................................................................ 10
Reference list ........................................................................................................................................ 11
Appendix I - Correspondence between firms ....................................................................................... 12
Appendix II - Minutes of meeting ......................................................................................................... 14
Appendix III - Figures .......................................................................................................................... 166


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Introduction

This report is designed to guide the process for Iceberg Footwear and Kratos in their desire to form a
non-equity contractual alliance. This alliance will allow both companies to improve market share in
the global athletic footwear industry and increase profits for both companies through a co-
marketing alliance focussing on co-option and internalisation value creation logics. The document
will provide essential background information, provide parameters for gathering information
regarding the needs and contributions of both partners, and identify how the alliance will benefit
Iceberg Footwear and Kratos. The report will also discuss the management of the alliance as well as
how the performance of the alliance will be measured.

Industry & Company Background

Industry Background

The global athletic footwear industry is today a fast paced race between twelve companies
competing for market share and profits by implementing different strategies. The prospects for
long-term growth in the industry are great as athletic shoes have become a recent trend now being
used as everyday, casual footwear by children, teenagers and adults (Thompson, Stappenbeck and
Reidenbach 2009). As a result, global demand for these shoes has increased significantly in recent
years and is expected to reach 84,454 pairs in 2014, up 17,754 pairs from 2013s demand of 66,700
pairs (Thompson, Stappenbeck and Reidenbach 2009).

Annual growth of 5-7% is expected to occur in the next 2-7 years in the branded footwear segment
(Thompson, Stappenbeck and Reidenbach 2009). The private-label footwear market also expects
growth of 8.5% during this period (Thompson, Stappenbeck and Reidenbach 2009). Rivalry will
continue to be intense due to these growth rates, and all competitors must therefore implement
new or revise current strategies in order to remain competitive.

Iceberg Footwear - Company Background

Iceberg Footwear operates in the wholesale and internet segments of athletic footwear. Since 2011,
the company has implemented a low-cost leadership strategy. Iceberg implements this strategy by
having below average material and manufacturing costs in order to keep prices low. In 2013, the
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company had the lowest warehouse expenses in the industry as well as minimal marketing and
administrative expenses (Figure 1). Iceberg does not use celebrity endorsements or implement
corporate social responsibility practices in order to keep costs to a minimum. Manufacturing plants
were initially located only in North America and Asia-Pacific however two years ago a plant in Latin
America was established in order to further this low-cost strategy and generate economies of scale.

This strategy has allowed Iceberg to gain the second-largest market share in all regions of the
internet segment. The company is also the market share leader in the wholesale segments of North
America, Asia-Pacific and Latin-America with 11.3%, 13.1% and 12.7% share respectively. Icebergs
image and credit ratings have risen in the last three years and EPS (Figure 2), ROE (Figure 3) and
stock prices (Figure 4) have almost always exceeded investor expectations highlighting the
companys strong financial performance.

In recent years Icebergs competitive strengths have included low retail and wholesale prices, large
numbers of models offered both online and through retailers, the companys recent introduction of
free shipping as well as speedy delivery times to wholesalers. Although the industry views Icebergs
low S/Q ratings compared to competitors and lack of celebrity endorsements as competitive
weaknesses, these ensure costs to consumers are kept to a minimum.

In the internet segment, Icebergs main competitor is G.O. Apparel, the overall leader in terms of
market share. The major competitors in the wholesale segment vary depending on region with
EElite, G.O. Apparel and Hyper Fusion closely following Icebergs majority share in North America,
Asia-Pacific and Latin-America. EElite and G.O. Apparel are the market share leaders in Europe-
Africa.

Kratos - Company Background

Kratos strategic vision is to pursue steady growth through a low-cost production strategy. Kratos
aims to keep production costs low by focusing on productive efficiency and also ensures
administrative and advertising costs are kept to a minimum. As a result, Kratos has offered some of
the lowest prices relative to competitors in both branded (Figure 5) and private-label (Figure 6)
footwear segments. Furthermore, Kratos seeks to focus heavily on corporate social responsibility to
ensure good corporate image and create a sustainable business for the future.

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Kratos has experienced consistently strong performance in the private-label market in North
America, Europe-Africa and Latin-America. Furthermore, Kratos has some of the lowest
manufacturing costs in branded production (Figure 6), and above average profits in the internet
segment. In recent years, expected ROE (Figure 3) has been achieved. While EPS (Figure 2) was
reaching investor expectations, minor setbacks in the last year have required a reconsideration of
strategy in order to achieve investor expectations. Kratos high image rating and A credit rating are
two of the companys main strengths and Kratos aims to further improve both of these in the
coming years as they are extremely important regarding the implementation of Kratos ethical
business practice strategy. Since 2011, Kratos has achieved an average market position due to its
focus on lowering costs, rather than market leadership in line with its steady growth strategy.

Alliance Design Aspects

Alliance Value Creation Logic

The Iceberg-Kratos alliance will create value for the parent companies by utilising and developing
each companys low-cost leadership strategies. This will involve increasing production capacity and
using socially responsible production techniques in order to realise economies of scale, reduce costs,
increase output and strengthen both companies market position in order to seek co-option value
creation. By utilising a non-equity co-marketing alliance, the companies will be able to keep
contractual costs low, while still working towards individual and alliance-level goals. As both firms
benefit equally from the sharing of tangible and knowledge resources, there is little risk involved
thus a non-equity alliance is appropriate in order to capitalise on the alliances value creation logic.

Iceberg will offer their production capacity in Latin-America and Asia-Pacific, allowing Kratos to
expand production and for both companies to co-market each-others product. This will allow the
alliance to streamline production of both companies in Asia-Pacific and Latin-America, improving
their supply chain networks and increasing productivity and efficiency. Value will be created for
both companies as they will experience substantial cost reductions through increased economies of
scale and decreased manufacturing and labour costs. This will allow the expansion of wholesale
production for both companies and leave a sufficient amount of capacity to sustain and expand
Kratos private label functions. In return, Kratos highly productive, socially responsible production
techniques will be adopted by Iceberg in order to improve efficiency and ensure a strong image
rating for both companies. As both firms reduce costs they can individually create more value for
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their brands by directing more capital towards corporate social responsibility and advertising, as well
as increasing retailer support and reducing delivery times.

A non-equity co-marketing alliance will allow both companies to reduce costs for the length of the
alliance, while still maintaining ownership rights should the alliance be unsuccessful (Bamford et.al
2003). This will create value, as both companies will be able to maintain their respective operations
in different areas, decrease individual costs and improve their competitive advantages. The value
creation logic also allows room for expansion of the alliance, which could, in the future, allow both
companies to enter different markets, production sectors and even industries and change the
competitive landscape of the athletic footwear industry.

Alliance Goals

The Kratos-Iceberg alliance will be set up to expand the production capacity of both firms, while
realising cost-savings as well as highly efficient and socially responsible productive techniques.
These will be achieved by utilising and combining Icebergs warehouses in Latin-America, and both
firms production facilities in Asia-Pacific, as well as sharing Kratos highly efficient and socially
responsible production techniques.

The basic goal of the initial alliance is to increase the market share of both companies as a result of
co-option value creation. Through co-marketing the products, this also allows each firm to invest
more into the branding of their respective products, and increase their exposure and power in their
current markets through increased models offered. Furthermore, the Kratos-Iceberg alliance will
open up opportunities to expand product lines and improve S/Q ratings, while leaving more finances
for advertising and improving brand image and recognition.

Alliance Design Features

The alliance will be designed as a non-equity contractual alliance, with plans to continue and deepen
the alliance in the future. We have chosen a non-equity, contractual alliance initially to maintain
independent functions, branding and marketing, and for added security. A joint venture was
considered however, due to the industry being a red ocean (Kim and Mauborgne 2009), both
companies believed creating a new competitor would cannibalise the parent firms. Furthermore, as
neither companies have had experience allying before, we believe a non-equity contractual alliance
is the perfect initial solution. Both firms will be able to build a strong relationship with one another,
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achieve our individual and common goals, and later expand should the alliance be successful,
without investing too much of the companys finances, knowledge and resources. Iceberg and
Kratos represent a good strategic fit as they both implement low-cost strategies, while offering
unique selling points, which are compatible with the goals of the other. As a result both companies
will be more open and willing to negotiations, with neither company possessing markedly greater
bargaining power than the other.

Iceberg and Kratos plan to utilise production facilities in Latin-America and Asia-Pacific to expand
production of branded shoes for both companies, as well as Kratos private label. Iceberg will allow
Kratos to utilise their production facilities in Latin-America and Kratos highly efficient, high output
production techniques will be taught to Iceberg. By co-marketing each others branded products,
which will further reduce costs, both companies can improve their competitive edge. In doing so,
both companies will expand their offerings in the wholesale segment at lower costs, and ensure
enough capacity to expand Kratos private label segment if industry trends were to change with
increasing demand for this market segment.

Future Opportunities

The alliance is open to further opportunities in the future due to the ability to change the scope,
design, and management of the alliance over time, as each companys goals change, and as the
market landscape moves through the industry life cycle. This includes sharing knowledge of
particular markets or production sectors, such as Kratos private label functions, and Icebergs
knowledge of emerging markets to further pursue a co-option strategy. It also allows both
companies to work towards future goals, and potentially enter an equity alliance, such as an
independent joint venture, or even conduct a merger to create a more formidable force in the face
of strong competition in the industry by combining all capabilities and functions in order to promote
overall efficiency.

Alliance Management

Governance

Iceberg and Kratos acknowledge that effective corporate governance is an essential factor in
determining the success of an alliance. A Board will thus be established to attend to governance
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matters touching upon business and strategy plans, employment benefits and remuneration, share
capital and dividends, capital and revenue commitments, corporate reporting, corporate
governance, corporate social responsibilities and internal control and risk management. The Board
will be comprised of a team of representatives from Iceberg and Kratos consisting of their respective
executive chairman, three executive directors and three directors. Meetings will be conducted on a
quarterly basis with further meetings convened as required. In order to ensure the effectiveness of
this governance, the Board will be required to review its composition and the balance of knowledge,
skills and experience, which its members bring on a systematic basis.

Risk Management

Iceberg and Kratos appreciate that managing a variety of risks in strategic alliances is a complex task.
In order to identify and address changes in the alliance, industry landscape and market, the Board,
as mentioned above, will meet bi-annually for this specific purpose. The Board will attend to
matters that have the potential to threaten the longevity of the alliance including; equal
contribution and investment, moral hazard issues, unintended transfer of knowledge, differing
strategic interests, managerial and communication methods and expectations of partners.
Establishing a system of accountability and communication are key elements to overcoming such
risks and nurturing a successful alliance. The Board will ensure that all levels of employees have a
clear understanding of partner expectations, task lists and timelines. Through the initiation of an
advanced marketing workshop that identifies the blueprint for the alliance and attains consensus
from all levels, accountability will be instilled from the outset. The workshop is particularly
important for Iceberg, as it will address explicit marketing mediums and tactics, establish a cohesive
marketing message, decide upon the engagement model between alliance partners and extend
communications.

The formation of an alliance further decreases performance risk. Sources of performance risk
include environmental factors such as economic recession, government policy changes and war
while market factors include demand fluctuations and intense competition. The performance of a
firm can always fall below expectations however, the establishment the Kratos-Iceberg alliance will
allow for risk sharing and cost-sharing in a dynamic industry.

Alliance Performance

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As strategic alliances are inherently convoluted, it is critical to monitor alliance performance in order
to track progress and recognise growth prospects. The success of the Kratos-Iceberg alliance will be
assessed by three different indicators: financial, objective, and subjective.

In regards to financial indicators, net profits, EPS and ROI rates will be monitored quarterly after the
first year in order to allow the alliance team to focus their efforts into more important areas in the
first year. This will allow the parent firms to gauge the value created by the alliance, by
accommodating for fluctuations in numbers that may prompt a premature termination of the
partnership. While financial indicators reflect the execution of certain strategic objectives, it must
be recognised that the Kratos-Iceberg alliance was not solely formed for profit generation.

Objective indicators, specifically learning effectiveness, compensates for the limits of financial
indicators. For Iceberg, learning will be assessed on a short-term and long-term basis, with annual
evaluations. The goal of a greater image rating will be assessed based upon the development of
corporate social responsibility capabilities. Another objective measure that will serve as the final
form of measurement is alliance longevity. By acknowledging the duration of the alliance, both firms
must reach a consensus on the future direction of the relationship. In the case of Iceberg and
Kratos, the options consist of: further pursuing original objectives, developing new opportunities,
engaging in multiple joint projects or dissolving the alliance.

Subjective measures are also significant in assessing performance, with alliance literature often
touting parent satisfaction as the most appropriate indicator of success (Walter, Lechner and
Kellermanns 2008). Perceptual indicators, primarily conducted through surveys, convey the level of
satisfaction with the partner firm, the overall alliance and the achievement of goals. Meanwhile,
indicators of relational quality express how alliance staff rate the quality of information exchange
and cooperation. Subjective indicators of the Kratos-Iceberg alliance will expose the quality of
relational assets and the degree of trust. With relational assets as one of the major determinants of
alliance success, subjective indicators can expose grave issues within the partnership that may not
be detected through the use of financial indicators.

While the implementation of these varied measures will allow for a more comprehensive
understanding of the alliance, it should be noted that performance metrics are intertwined with
value-creation logic (Cravens, Piercy and Cravens 2000). Consequently, metrics determining the
success of the Kratos-Iceberg alliance will constantly evolve along with alliance strategy.
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Conclusion

This document aims to further your understanding of the proposed contractual alliance between
Iceberg and Kratos. In order for the alliance to be successful, many measures must be implemented
and revised frequently in order to ensure that both companies goals are being met. By executing the
strategies mentioned in this report, Iceberg Footwear and Kratos should experience fantastic
outcomes in future years.



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Reference list

Bamford, J. D., Gomes-Casseres, B., Robinson, M.S. 2003, Mastering Alliance Strategy: A
comprehensive guide to design, management, and organisation, Jossey-Bass, San Francisco

Cravens, K., Piercy, N. and Cravens, D. 2000. 'Assessing the performance of strategic alliances:
Matching metrics to strategies, European Management Journal, vol. 18, no. 5, pp. 529-541, viewed
29 May 2014, Sciencedirect, 10.16/S0263-2373(00)00042-6

Kim, W.C. and Mauborgne, R. 2009, Blue ocean strategy, Leadership Excellence, vol. 26, no. 5, pp. 4,
viewed 25 May 2014, ProQuest, 204625498

Thompson, A.A. Jr., Sappenbeck, G.J., Reidenbach, M.A. 2009, The Business Strategy Game Players
Guide, McGraw-Hill/Irwin, Burr Ridge

Walter, J., Lechner, C. and Kellermanns, F. 2008, 'Disentangling alliance management processes:
Decision making, politicality and alliance performance', Journal of Management Studies, vol. 45,
no.3, pp. 530-560, viewed 28 May 2014, Wiley Online, 10.1111/j.1467-6486.2007.00749.x


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Appendix I - Correspondence between firms

________________________________________
From: Isabella Tattam <itat5056@uni.sydney.edu.au>
Subject: RE: Prospective Alliance
Date: 15 May 2014 11:42:12 AM AEST
To: Mikaela Meiling Lui <mikaela.meiling@live.com>

Dear Mikaela, Gabrielle and Cecilie,

Wonderful news. This time is suitable for us. I have booked Room 204 in Fisher Library to conduct
our meeting.

We are looking forward to meeting you to discuss what we hope will be a very successful alliance.

Kind regards,
Isabella, June and Shihan
________________________________________
From: Mikaela Meiling Lui <mikaela.meiling@live.com>
Sent: Thursday, 15 May 2014 11:14 AM
To: Isabella Tattam
Subject: Re: Prospective Alliance

Dear Isabella, June and Shihan,

We are very interested in discussing a prospective alliance with you. We believe our strategic goals
would be well suited to benefit both firms equally. We would like to meet with you on the 16th of
May at 11am if that is possible to discuss our strategic direction and develop an appropriate alliance
strategy, is this convenient for you?

We are looking forward to beginning our strategic relationship with Iceberg Footwear.

Kind regards,
Mikaela, Gabrielle and Cecilie.

On 12/05/2014, at 8:58 AM, Isabella Tattam wrote:

Dear Mikaela, Gabrielle and Cecille,

Iceberg Footwear has been among the leading first-tier firms in the global footwear industry for over
three years. Our unique cost leadership strategy, coupled with our streamlined production capacities
have been instrumental to our overall success. We have managed to keep the company lean through
the implementation of numerous measures - for instance, setting up new facilities in emerging
market regions, providing employee training for 5-star S/Q ratings and lowering administrative costs.
Despite our immense cost-reduction measures, we have been able to capture major market
segments and maintain large market shares in branded footwear.

Currently, we aim to further capitalize on branded footwear and acquire market leadership by
allying with another first-tier company within the industry. We believe that an alliance with your
firm would be an incredible opportunity for both of us, in terms of internalization and building
critical scale as mentioned in your proposal.
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Please kindly let us know when would be a suitable time to further discuss this opportunity face to
face.

Kind regards,
Isabella, June and Shihan
Iceberg Footwear

________________________________________
From: Mikaela Lui <mikaela.meiling@live.com>
Sent: Sunday, 11 May 2014 10:45 AM
To: Isabella Tattam; juneh9@live.com; jsh3022@gmail.com
Subject: Prospective Alliance

To Isabella, June and Shihan,

Kratos has experienced success in the athletic footwear industry over the past 3 years. Kratos
specialises in low-cost, value footwear and have experienced success, particularly in the private label
sector, by lowering production, material and administration costs, reducing reject rate and offering a
relatively small product line. Our overall strategy is to provide affordable, value for money footwear,
while maintaining ethical business practices and ensuring judicious financial management as to
create a sustainable business. We have been able to do this by investing in worker and management
training, keeping a low S/Q level and focussing on our productive strengths.

We are currently looking to enter a learning alliance with a like-minded company, wherein we can
share our low-cost, high efficiency production and specialisation in private-label operations in
exchange for knowledge of wholesale and branded production markets, wider product lines and
establishing customer appeal.

If you are interested in discussing this further, please contact us regarding your strategic direction.

Kind Regards,

Mikaela, Gabrielle and Cecillie
Kratos


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Appendix II - Minutes of meetings
16/05/2014
1. Industry & Company Background - 700-800 words
Industry Background-150 words
Company Background (I)-300 words
Company Background (K)-300 words

2. Alliance Design - 650 words
Alliance Value Creation Logic
Co-option: changing industry landscape - both low cost, mid-tier firms.
Internalisation: K learning about wholesale and branded production; I learning about
private label sales.
Independent JV: low production cost, high financial stability (low risk taking), ethical
worker practices = lower reject rates & lower cost per pair production
I learning more productive worker training practices, corporate social responsibility.

Improving supply chain network plants in Asia Pacific/North America.
Alliance goals
Increase market share achieve low cost leadership
Expand product lines.
Dominate manufacturing in Asia Pacific.
Alliance Design Features
Similar market position - no power disparities, both have room to learn and improve.
K: high productive manufacturing, Private label and internet sales
I : Wholesale segment market knowledge, manufacturing plant in different region - LA
Equity-based, independent.
Scope: geographic - Latin-America/Asia-Pacific
o operational: wholesale/private label
o Products: shoes (higher S/Q)
o Future opportunities: sportswear, apparel, equipment ?

3. Alliance management - 650 words.
Governance: separate board of directors, CEO etc. quarterly reports to parent
companies.
Interface: equal members from each company on board of directors (3 each),
communication: open,
Risk management: bi-annual meeting of board directors to identify changes in
company/industry landscape/market.
o investments: increase manufacturing plants in AP - Expand LA.
o worker training (particularly for Iceberg)

23/05/2014
Introduction-Isabella
1. Industry & Company Background - 700-800 words-Isabella and Cecilie

2. Alliance Design -
Alliance Value Creation Logic - Shihan. - 350
Co-option: changing industry landscape - both low cost, mid-tier firms.
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Internalisation: K learning about wholesale, internet and branded production; I learning
about private label
I sharing infrastructure, K sharing CSR know-how and high productivity production practices.
I learning more productive worker training practices, corporate social responsibility.
Improving supply chain network plants in Asia Pacific/North America.
buyer-supplier non-equity contractual alliance.
o aim: increase market share in wholesale segment.
o greater CSR outlook, better HR management.
o keeping low-cost manufacturing.
in the case of overproduction private label segment of company K.
I input: tangible factories, production capacity
K input: high productivity (highest wages, lowest production cost per shoe).
Alliance goals - Mikaela - 200
Increase market share achieve low cost leadership, dismantle monopolies.
expand product lines.
Dominate manufacturing in Asia Pacific.
Future opportunities: co-specialisation entering previously weaker markets/segments,
expanding scope into other industries.
Alliance Design Features - Mikaela. - 300
Similar market position - no power disparities, both have room to learn and improve.
K: high productive manufacturing, Private label and internet sales
I : Wholesale segment market knowledge, manufacturing plant in different region - LA
non-equity contractual.
Scope: geographic - Latin-America/Asia-Pacific
o operational: wholesale/private label
o Products: shoes (higher S/Q)
o Future opportunities: sportswear, apparel, equipment ?

3. Alliance management - 400 words. -Gab
Governance: regular meetings and negotiations between heads of both companies -
quarterly.
Risk management: bi-annual meeting of company heads to identify changes in
company/industry landscape/market.
o investments: increase manufacturing plants in AP - Expand LA.
o worker training (particularly for Iceberg)
o Need an alliance function see lecture week 12. (could also be part of alliance
performance)

4. Alliance performance - 400 words-June
Financial indicators: show net increases in financial indicators for both companies to see if
alliance is helping or hindering (cannot directly link it to alliance, but its a start!) - after 3
years, 5 years, 7 years, 10 years.
o leaves room for economic fluctuations.
Learning: capability development greater image rating (better CSR practices) - annually
Alliance longevity: do we continue past achievement of objectives and develop new
opportunities or do we dissolve? (Multiple joint projects) - final measurement.
quantity, breadth and depth of knowledge shared - short term: ???; long term: decreases in
cost per shoe, decreased reject rate per worker.
subjective factors - manager and worker satisfaction.

Conclusion-Isabella (not included in word count)
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Appendix III-Figures














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