Please answer the following Caseanalysis questions

1-What has New Balance’s management done to implement andexecute the strategy? What policies, practices, support systems,and management approaches underlie New Balance’s strategy executionefforts?

2-To what extent has the New Balance Executional Excellenceinitiative impacted the firm’s performance?

3-What are the chief elements and characteristics of NewBalance’s culture? What mechanisms does New Balance use to nurtureand reinforce this culture? In what way, if at all, does thecompany’s private ownership impact the company’s culture?

New Balance Athletic Shoe Inc

On a pleasant August evening in 2005, Jim and Anne Davis enjoyedwhat was meant to be a relaxing dinner at home. As they fin­ishedtheir meal , however, they could not help but turn their attentionto a headl ine in that morning's BostonGlobe, a copy of which sat on their kitchen ta ble: "Adidas to buy Reebok."For over 30 years, the Davises had been the soleowners of New Balance Athletic Shoe Inc., one of the top fiveproducers of athletic footwea r in the world. Given their experi­ence i n the industry, they had suspected for some time that an Adidas-Reebok transaction might be in the works. Neverthe less, theformal announcement caused them to wonder about the implications ofthis deal for New Balance. By bringing together Adidas andReebok-the second- and third-largest  produc­ ers ofathletic footwear, respectively-this transac­ tion would createajuggernaut that would rival Nike, the largest competitor in theindustry. Although the Davises did not have to answer to WallStreet con­ cerning their competitive plans,they knew that many inthe industry-including their own  employees­ would soonbe asking for their response. Lately, the Davises had focusedsignificant atten­ tion on an initiat ive cal led New BalanceExecutional Excellence (N B2E), the goal of which was to in­ creasethe quality and efficiency of the company's operational processesthrough the application oflean manufacturing. Started less than oneyear earlier,

NB2E already had provided evidenceof early im­ provement, and the Davises did not want to lose thegrowing enthusiasm for this initiative among New Balance 's 2,600associates. Further,they realized the importance of staying true tothe private company's uniq ue operating philosophy, strategy,culture, and history.Nonetheless, they could not help but wonderwhether New Balance's priorities needed to be ad­ justed in lightof the shi fting competiti ve landscape.

THE U.S. ATHLETIC SHOE INDUSTRY'

The United States was the world'slargest mari

ln recent years, manufacturersmoved to com­ bine fashion and comfort to appeal to a broader rangeof consumers, namely those who wore athletic shoes for casualpurposes. Concurrently, a combi­ nation of technologicaldevelopments and style im­ provements in athletic footwear helpeddrive growth. While leather continued to be the most popular ma­terial for athletic footwear uppers, some firms, such asAdidas-Salomon (Adidas), had developed shoes with so-called "smarttextiles" and microchips that adjusted fit based on the wearer'sactivity, height, weight, and running terrain. Nike maintained acomfortable lead ahead of its competitors with 43 percent of thetotal global market for athletic shoes and apparel (see Exhibit Ifor sales and financial data for leading firms in the industry).Within the U.S. footwear market, Nike accounted for 36 percent ofthe market, while Adidas, Reebok and New Balance held on to avariable 8-12 percent each (Exhibit 2). Appendix A provides a briefdescription of each of the top competitors in the industry. Theacquisition of Reebok by Adidas would cre­ ate a firm that rivaledNike in terms of size and would boost Adidas 's share to roughly 20percent of the U.S. footwear market. Though the Adidas-Reeboktransaction was notable for its size, it reflected a broader recenttrend of consolidation in the ath­ letic footwear industry. In July2003, Nike acquired Converse, a Massachusetts based manufacturer ofcourt and casual shoes, for $305 million. In June 2005, StrideRite-the maker of casual footwear brands Keds and Sperry TopSider-announced its intention to acquire Saucony, a $I 70 millionmanu­ facturer of specialty running shoes and apparel based inPeabody, Massachusetts. With respect to worldwide marketing, Nikeout­ spent its rivals, spending $213 mi Ilion in measured media in2004, compared to Adidas' $89 mill ion and Reebok 's $42 million.2For the first JO months of 2005, for example, New Balance totaladvertising expenditure was $17.3 million.3 For all companies , alarge portion of worldwide media expenditure was geared toward themarketing of footwear brands in the United States (Exhibit2).

In addition to spending more onmarketing than New Balance, most of its competitors produced theirshoes outside of the United States, largely because themanufacturing of athletic footwear was highly l.abor intensive andrequired relatively low levels of worker skill. As a result,Chinahad become the larg­ est manufacturer of athletic footwear for theU.S. market, commanding 85 percent of the category.4 The U.S. tradedeficit in shoes was expected to con­ tinue to deepen, as moremanufacturers shifted pro­ duction offshore. The deficit hadincreased about 7 percent per year since 1999, reaching 379 millionpairs in 2004. Overall,Americans purchased 2.2 bil­ lion pairs ofshoes and boots in 2004, enough to give each man, woman and childthere 7.7 new footwear options that year.5

DistributionChannels

In 2005, the American sneaker marketwas divided i.nto several discrete retai I channels catering to pe­riodically overlapping demographics that defined themselves bydistinctive tastes, buying patterns, and price elasticity. Foremostamong these were the "big box" chains such as Wal-Mart, Target, andSears which together sold an estimated $12 billion in ath- 1.eticapparel and equipment per year.6 The second­ Largest group by salesvolume included national sellers such as Foot Locker, The SportsAuthority, Finish Line, and The Athlete's Foot. Next were smallerurban chains that maintained strong ties to tastemakers andarbiters of fashion. These chains typically either sold brands atheavy discounts to younger consumers or catered to high-end custom­ers with very specific needs (e.g., high-performance running). Theleading sneaker manufacturers, such as Nike and Adidas, alsomaintained showcase stores that featured new products in lavishdisplays accom­ panied by TV screens and music.These branded out­lets were less retail stores than museums to the sneak­ ers oftomorrow and the "classics" made legendary by the likes of Pele,Chuck Taylor, and Michael Jordan.

With 4,000 stores around the world, Foot Locker was widelyrecognized as the world's leading retailer of athletic shoes andapparel. Foot Locker contribut­ ed slightly less than I0 percent toNike's annual sales, but Nike products represented as much as 50percent of sales for Foot Locker. The Sports Authority had 400 U.S.stores, but maintained a broader product base, selling workoutequipment, basketball gear, sneakers and sports apparel. Finally,with 598 stores in the United States, Finish Line, originallystarted in the early 1980s as a discounter whose primary businesswas in "closeout" sales, prided itself in of­ fering prices thatwere typically $5 less than other retailers. Although beholden tothe vagaries of fashion and manufacturers' ability to design hitproducts that would drive traffic into their stores, larger re­tailers held a great deal of sway over the fortunes of the sneakercompanies. For example, even though Converse sneakers were soldthrough many retail and on-line outlets nationwide, Foot Lockeraccounted for roughly 20 percent of all Converse sales. Anydecision by Foot Locker about Converse's product placement thuscould have a material impact on the brand's sales. In another case,a 2003 dispute over promotional practices for Nike shoes caused acostly one-year rift between the manufacturer and Foot Locker.

THE MAKING OF NEW BALANCE

New Balance was founded in Boston in1906 as New Balance Arch 7 by William J. Riley, a 33-year-oldBritish emigre who committed himself to helping people with problemfeet by making arch supports andprescription  footwear  to improveshoe  fit. In I 934, Riley went into partnership with hisleading salesman, Arthur Hall. In 1954, Arthur Hall sold thebusiness to his daughter and son-in-law, Eleanor and Paul Kidd.Arch supports and prescription fool:vear remained the cornerstoneof the business until 1961, when they manufactured the Trackster,the world 's first performance running shoe made with a ripple soleand available in multiple widths.

Du.ring the 1960s, New Balance'sreputation for manufactu.ring innovative performance footwearavailable in multiple widths grew through word of mouth andgrassroots promotions. When Jim Davis bought the specialized shoeman ufacturer from the Kidds on the day of the Boston Marathon in I972, he committed himself to  upholdthe  company's founding va lues of fit, performance , andmanufac­ turing . He recalled: I wanted to buy a company, Iwa  young and single. I didn't have anything. so I hadnothing to lose. [ looked at it a year before I bought ii.Al thetime, I was in electronics. 1 pa. ed. because l knew noth­ ingabout footwear and not much about spotting goods.other than what Iknew from doing spotts in college. I got a pair of the hoes.stattedrunning in them,and peoplewould come up lo me and comment that Imust be a good runner. Unable to put a deal together inelect1-onics.with the company still avail­ able. I went back,and the guy was desperate losell it. We paid $100,000 for the company;we put $10,000 down, and the rest of the $90,000 was generated fromlowering im•ento1y.

At the time N ew Balance wasprimarily a mail­ order business with only a handful of U.S.retail­ ers. Jim Davis started traveling around the country toexpand reta il distribution , and sales grew from $ I 00,000 toaround $300,000 over a two-year pe­ riod. Anne, who wou l d marryJim in 1984, joined New Balance in 1978 and focused on bui lding adis­ tinct culture for New Balance associates and those who woulddo business with the company around the globe. Indeed, N ew Ba lance's first international sales office and first Europeanmanufacturing facility both opened in 1978 in Europe. Since thenthe brand had expanded from Europe and Asia to the Middle East,Latin America, and Africa.

In the early 1980s New Balance setup new manufacturing facilities in New England and signed oninternational distributors. In 1982, the company reached the $60million mark and debuted the well­ received 990 running shoe, thefirst athletic shoe priced at $ 100.1 Jn the 1990s, the companyunveiled its New Balance Suspension System to telegraph itsemphasis on cutting-edge R&D and its dedication to meeting theneeds of performance-oriented runners. The company 's commitment tomultiple sneaker widths remained a sell ing point that wasreflected in the brand 's iconic marketing logo of threedifferently sized feet.9 Being Different Herb Spivak, executivevice president of opera­ tions and a 12-year veteran of thecompany, provid­ ed a picture of New Balance's un ique features. Heobserved: Ow·values have been very, very con istent and re­inforced continuously by J im and Anne Davis. We do not endorseathletes, as an example. We aim to make every one of ow·shoes apc1fo1mance product as opposed lojusl a fashion product. We selleve1y shoe that we make in multiple width . because we believe thatfit is a critical pe1fo 1mance charac1e1is­ tic. We maintain agreat percentage of our product in inventory for replenishment. sothat dealers can con­ tinually get fill-ins when they sell and whenthey need ce1tain sizes and widths. In con1ra 1. competitors prettymuch tell retailers. "OK. tell us six months in advance what you're going lo want lo buy and we'll deliver it. But it's fixed. andwe don't plan on having future invenlo1y.'·These basic factors,combined with the maintainin g of our domestic factories all cometogether to describe what makes us unique.

Because the company had remainedprivate,Jim Davis felt that he and his colleagues could act morenimbly and be more socially responsible than their more well-heeledcompetitors. "I f we were a pu b­ lic company, I am sure theshareholders would say, cclose your factories and make the productabroad because you will make more dough for me and my quarterlydividend,"' Davis told the BostonGlobe in 2004.'0 Davis also felt thatthe company had prod­ ucts capable of providi ng sol id margin sneeded to generate the cash flow required  to financegrowth. As such, the company'sbalance  sheet  remained very strong with aseven-to-one ratio of assets to Liabilities.

Beyond financial flexibility, otheraspects of the company's operations and strategy suggested that itwas somehow different from competitors. President and ChiefOperating Officer Jim Tompkins noted: One thing that sets us apruiand that is we a1-e manu­ factun:rs. But "e at'C mediocre marketersby design. Our marketing spend as a percent of net revenue is muchlower than our competitors.The message that we talk about in themarketplace i different from our competitors' message. And that'swhat makes the company unique-ii is that we are manufacturing­ andoperations-based. not marketing-based.

Jim Davis emphasized thisdistinction: In the early lo mid- l 980s. Nikeand Reebok wem bothbecoming major players. and eve1ybody said, "You ought to really dothis because Nike and Reebok are doing it." Well , we tried a couple limes with product and programsand whatever, and we failed.drastically. So then l woke up one moming and I said, "We're notany good at that. We're really good at this ." So we concentratedon doing this instead of that, and thus differentiated ow-selves.Culture Similar to its unique business model, New Balance'scorporate culture developed over time. Teamwork was a criticalcomponent. "When you 're young and starting up," Jim Davisrecalled, "you don't really think in terms of a culture. You justsort of do things a certain way. One day we realized that we'revery team-oriented, and that we empower people. When we got to acertain size and maturity, we realized that that's basically whatwe were all about."Further, New Balance developed a long-standingcommitment to social responsibility that, according to Anne Davis,"made people feel good about deal ing with the com­ pany." Forexample, after the 2004 Asian Tsunami, New Balance declared that itwould match whatever its associates donated. Then retailers wantedto par­ ticipate, so New Balance decided to match their con­tributions for a total contribution of $1 million. The company alsopromised to donate another $1 million if 100 pen;ent participationwas reached among as­ sociates. In the end, every person in theorganization contributed something.

The company's culture was also very entrepre­neurial, startingwith the owners' willingness to take risks and encourage others todo the same. Anne em­ phasized that this culture of change andchallenge extended to the factory, noting thatmatmfacturing em­ployees, mostly organized in cross-functional teams, representedone of the greatest forces for change in the company.This spiritwas also reflected across New Balance's senior managers. ChiefFinancial Officer John Withee observed, "Continuous improvement isa mantra here. Do the best you can, work cross­ functionally, andwork towards a common goal." As an example of a major risk takenrelatively early on by the company, Jim Davis pointed to theintroduction of the 990 series running shoe in the 1980s, the first$I 00 shoe at a time when athletic shoes were retai ling for about$50. "People said we were nuts;' Jim mused, "but we couldn 't makethem fast enough. People learned from that and be­ came moreconfident in pushing the envelope."As of 2005, the 990 series stillrepresented the top-selling product for New Balance, accounting forroughly 3.5 percent of the company's sales.

Endorsedby No One

In an industry dominated byendorsement deals and large print and TV campaigns featuringcelebrity ath­ letes, New Balance put its energies and investmentinto research, design, and domestic manufacturing, and let theresulting products speak for themselves. New Balance felt it couldeschew celebrity endorse­ ments and position itself as a brand forperformance­ oriented runners lessswayed  by  fashion  trends andpopular personalities. New Balance extended its product-focusedstrategy to its branding efforts in 1992 with its "Endorsed by NoOne" campaign despite holding only 3 percent of the U.S. market forathletic shoes at the time."

New Balance introduced edgieriterations of the campaign that culminated with an anti-endorsementad message that actually chided professional athletes for losingsight of the game and focusing dispropor­ tionately on endorsementdeals. With slightly older core customers (between 25 and 49), NewBalance concluded it could afford to take this irreverent tone incommercials. The "For Love or Money" campaign was unveiled inFebruary 2005.12 The slogan felt "nat­ural to us because it wassomething that only New Balance can stand in front of;' said PaulHeffernan, executive vice president of global marketing. "Jt's allabout everyday athletes playing for the love of the game."13 Bycontrast, Reebok introduced a new ad campaign of its own that samemonth featuring bas­ ketball icon Yao Ming, Olympic gold medalistKelly Holmes, actress Lucy Liu, and tennis player Andy Roddick,with the tagline "I Am What I Am.'*

The New Balance campaign featured ayou ng basketball player admonishing "some of the pros out there,"for their swagger and potentially un­ sportsmanlike conduct on andoff the court that had become accepted behavior in some quarters.Most notably, a game-ending brawl during a Detroit Pistons game inAuburn Hills, Michigan, on November 19, 2004, that erupted afterIndiana Pacers' forward Ron Artest leapt into the stands toretaliate against a spectator who had lobbed a cup of beer atplayers from the stands. The New Balance campaign took a directapproach with an unassailable jibe: "Is fight­ ing in sportseverjustified?" In addition to 30-second TV spots, the campaignincluded print, billboard, and onl ine ads that posed a series ofquestions about athletes'-and by exten­ sion, their fans'--corevalues: "Can a losing coach still be a good coach?" and "Whichteaches a player more, winning or losing?"Yet another New Balancead 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 Aoor burn looks like." New Balance wasreportedly planning to spend $21 million on its 2006 advertisingcampaign, which was close to its entire promotional budget for theyear.16

PRODUCTDESIGN

According to Paul Heffernan, NewBalance's focus on width sizing and fithad  historically  dictated the design of manyof the company's products. He explained: A 15-year-old who wants apair of Nike Air Jordans might curl his toes or put on six pairs ofsocks to make that shoe fit. tn that case, purchases are made basedon how a shoe looks rathe1·whether it really fits well. The marketthat is interested in width sizing and fit is a little bit olderand more mat u.re; those custom­ ers demand a product that is a bitmore conservative in its presentation and style.They tend to like aprod­ uct and buy it again and again and again. It 's Like a whitebutton-down shirt. I own a white button-down, it wears out, I buyanother white button-down.

New Balance had approximately 60people in product design and development who were involved withefforts on two fronts. One was incremental de­ velopment ofexisting models. The second involved the incorporation of newtechnologies such as Absorb EX-a premium, visible-cushioning technology­ and Zip, a patented responsive-cushioning technol­ ogyscheduled to debut in 2006. Both technologies were oriented towarda younger customer base.

Despite New Balance's desire forlong-lived products, Heffernan knew that the company had to remaincapable of delivering prod ucts to the shorter­ cycle,fashion-oriented segments of the market. He noted:The 991series-our franchise shoe of 25 years­ stays in line three years.With t hree ye;us to update that shoe, we can afford lo lake ourtime and be more thoughtful. But the more fashion-oriented productsoften need to chw·n every 60 to 90 days. which cre­ ates acompletely different model for prod uct design. The fashion segmentcares !es about widths and more about time to market, so we need towork under tighter timelines for these product .

Jim Davis felt that in the past fiveor 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 designmore tha n we have in the past and are raising the level and tatureof design within the organization. Design is going to become moreimpo1tant as time goes on. a much larger foclor than it has been.We tend to be a little bit more conservative with design than ourcompetition and stay within a ce1tain real.m for a relatively longpe1iod oftime. Then we find that we might have hit a wall. o wehave to come back and reinvent ourselves a little bit and moveforward. The manufact uring folks do that every day. The rest ofthe company is so11 of playing catch-up there, and we have to re­invent ou1-i;e lves a little bit more often than we have in thepast.

SALES AND DISTRIBUTION

New Balance had focused more onsmaller retailers, running specialty shops, and family footwearshops. John Withee explained, "We are heavi ly focused onsupporting the smaller type of service-oriented cus­ tomer." NewBalance sold its products through ap· proximately 3,500 retailersrepresenting over 12,000 sites, commonly referred to as "doors."Its largest retai I 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 retai lers into two groups-key accounts andspecialty dealers (see Exhibit 3). Key accounts were furtherdivided into six strategic accounts and 49 other key accounts.Specialty retai lers were subdivided into three major channels:elite ru nning stores (i.e., specia lty stores for seriousrunners); independently owned and op­ erated New Balance stores;and other independent dealers, which were primarily family shoestores.

Fran Allen, executive vice presidentfor sales and service, noted that strong relationships with bothsmall and large retailers were critica l for New Balance. "Theimportanc.e of independent, specia lty retai lers to the image ofour brand far exceeds their 25 percent share of our sales volume.Obviously, large accountsare  extremely  important  in  termsof their sales volume. Consequently, we give both groups a lot ofattention and work hard to give each what they need to besuccessful."

In contrast to competitors, NewBalance relied on a sales force that was composed of independentagents. Allen noted, "In the sporting goods industr there is anunwritten rule-or maybe it isjust natural selection-that as you getto a certain point in sales volume, you grow out of an independentsales force. You bring the sales organization in house. At NewBalance, we do not have any in-house accounts. We prefer usingindependent, dedicated sales agencies with an entrepreneurialmindset." Indeed, all the company's sales agents were independentof-but exclusive tNew Balance. These sales agencies werecompensated through a sales-based commission. Under this system,new salespeople might earn $40,000 to $50,000 per year (from whichthey would cover their own expenses) whi le the most experiencedsalespeople could make several hundred thousand per year. Largeretail ac­ counts were managed by a total of 10 head sales agents,6 of whom were strategic account managers (SAMs). Specialtyaccounts were managed by ap­ proximately 100 agents, who worked forindepend­ ent sales agencies, but were managed by five regionalmanagers employed by New Balance (see Exhibit 4). New Balance wasinvesting in a sales force automa­ tion system to increase theagents' productivity.

Despite the fact that these agents were not direct employees ofNew Balance, Allen-who had been with New Balance 15 years as salesmanager-not­ ed that the company was not concerned about theserelationships that were u nique to the industry. "We have a loyalgroup of salespeople, and their longev­ ity of service provides uswith a distinct edge over our competitors," he explained,attributing this loy­ alty to the strength of New Balance 'sleadership and culture. He added: In 1991, my first year at NewBalance, the company sold $84 million in footwear in the UnitedStates; last year, we did a little over $1 billion. One of thereasons Jim Davis liked this sales organ'ization was that he hadhead sales agents who had been with him for 15 or 20 years before [got here and had gone through some difficult times and stuck withthe company.

For smaller, privately ownedretailers, New Balance had historically paid an independent salesrepresentative to take product orders and either key them into theNew Balance order system or fax them to New Balance's corporatesales office at company headquarters in Allston, Massachusetts. Tospeed the ordering process, the company had recently invested inwhat Chief Financial Officer John Withee termed a"state-of-the-art" ilistribution center and was us­ ing technologyto leverage this resource, support its retailers, and strengthenits retail relationships. In terms of information technology, a newsales force automation system enabled sales representatives toplace direct orders remotely, access New Balance's inventoryinformation, and check on delivery sta­ tus business-to-business(B2B). A B2B application promised to enable retailers-particularlysmaller retailers-to do the same without intervention by the salesrepresentative. Withee added, "This appli­ cation helps manage theflow of product through the supply chain and is about as vital asyou can get in determining our performance."

Going forward, Withee explained, theB2B ap­ plication would help reta.ilers directly manage basicordering, thereby freeing up the sales representative to engagewith the retailer and make recommenda­ tions about new items tocarry or options for reduc­ ing inventory levels. Concerningretailers, Jim Davis explained: If you've been selling New Balanceshoes for  the last I 0 years, to sell 1,000 pairsyou  had  400 pairs in inventory. Assuming youare selling all domestic product, which some of our accounts do, wewould say: "We think we can increase your sales next year and loweryour invento1y at ihe same time. We will ship to youthe  day after you order the product, so yom inventotiescan be decreased dramatically. Rather than canying 400 pairs, youcan cru..-y 200 pairs, and sell maybe 1,200 pairs instead of 1,000.And your mru·kdowns ru·e negligible, because your inven­tory's so low:' And we think ihat's a very compelHng argument. Weru·e taking all the risk when we do that.

By shipping quickly and accurately,New Bal­ ance offered retailers the ability to build loyal cus­tomers of their own. Indeed, according to Jim Davis, New Balancehad far the greater consumer loyalty than any of its competitors."That translates well for the retailer, especially if thatretailer's able to satisfy the customer with that 13EEEE, becausethat cus­ tomer always wants that 13EEEE. He or she will generallygo back to that same retailer to get that product.. And retailerslmow that!'

SUPPLY CHAINAND  MANUFACTURING

Jncontrast  to  Nike and  Reebok, whooutsourced nearlyall  of  their  production  toAs.ian manufac­ turers, New Balanceused  outsourcers  for only 75 percent of itsU.S. volume. For the remaining 25 per­ cent,final product assemblytook place in one of New Balance's five factories in  theNortheastern United States. One-third of thesedomestically  assembled shoeswere  referred  to  as "cut throughassembly" product. For these shoes, New Balance would importfinished soles and the raw materials for the upper from Asiansuppliers. The uppers would then be ful­ ly manufactured andattached to soles in the United States. The remaining two-thirds ofNew Balance's domestic product was referred to as "sourced up­per." For sourced-upper shoes, New Balance would importfinished  uppers  and  soles  from  Asiaand would complete the assembly by attaching the appro­ priatelysized uppers and soles at its U.S. factories. The moretime-intensive cut-through-assembly prod­ uct was manufactured atNew Balance's factories in Lawrence, Massachusetts; Skowhegan ,Maine; and Norridgewock , Maine. Sourced-upper shoes were as­sembled at these three sites,as well as another factory in Norway,Maine.17 Exhibit 5 provides an overview of the manufacturingnetwork and supply chain.

Foreign Suppliers

New Balance sourced the soles formost of its shoes from two suppliers in China (suppliers A and B inExhibit 5). Depending on the shoe, these two firms also suppliedeither finished uppers or kits contain­ ing a significant portionof the materials required to stitch uppers in the United States.18Finally, these firms provided a limited amount of fully assembledshoes. These firms shipped to New Balance's three materialswarehouses , two in Skowhegan, Maine, and one in Lawrence,Massachusetts.

Historically, it would takeapproximately one week for New Balance to place a purchase orderfor components (e.g., soles, uppers, or kits) and have it acceptedby the appropriate supplier in China. It would then take roughlysix weeks for the supplier to manufacture the required componentsand an ad­ ditional five weeks to ship them by boat across thePacific and transfer them to cross-country transport for deliveryto the designated warehouse. Until the early 2000s, New Balancetended to place orders for a particular sole on a monthly basis inbatches as large as 20,000 pairs. For a single type of sole, eachorder would include roughly 20 different SKUs, re­ flectingdifferent shoes' lengths and widths such as 90, J OY,E, and12EEE.

John Wilson, vice president formanufacturing, noted that the company had taken several steps inrecent years to reduce the lead times from Asian suppliers. First,New Balance had shifted to placing smaller orders of between 2,000and 10,000 pairs on a weekly basis. Jn addition, New Balance madear­ rangements with these suppl iers to enable them to "pre-buy"their own raw materials on behalf of the company, thereby reducingthe lead time required to produce an order. Based on the aboveinitiatives and other efforts to reduce lead time, the average timefrom placing a component order with a suppl ier to having thoseitems available at the New Balance materials warehouses fell from12 weeks to approxi­ mately 9 weeks by 2005.

New Balance also contracted with twoother Chinese manufacturers whowere  responsible  for 75 percent of NewBalance's foreign final product assembly. These firms shippedfinished shoes to several of New Balance's smaller internationaldivi­ sions, but most were bound for the United States and weresent via ship directly to New Balance's product distributioncenters in Lawrence, Massachusetts, or Ontario, Cal ifornia. Theorder-to-delivery lead time 25 percent of the total, whilematerials accounted for the remaining 50 percent. Estimates of thetotal cost for a cut-through-assembly pair of shoes assembled inthe United States was approximately $13 greater than a similarproduct fully man ufactured in Asia. For "sourced upper" pairs,this difference was thought to be about $0.50, due to import dutiesplaced on fin­ ished goods entering the United States.

In 200 I, the average lead time for acut-through­ assembly batch (typically consisting of 12 pairs ofshoes) through a New Balance plant-measured from arrival of the rawmaterials to loading on the truck as finished product-was roughly8.5 days. By 2005, the company had reduced  this time to2.5 days through significant attention to process improvement andwork-in-process reduction within the plants. Wilson and hiscolleagues believed that further reductions in manufacturing leadtime were attainable. Following production, domestically assembledpairs were transported via truck either directly  to theretai ler (in the case of large strategic accounts) or to inventoryin the Lawrence or Ontario distribu­ tion center. Each of thosesites received and filled orders from smaller retailers. Combined,these two distribution centers held roughly 6.4 million pairs offinished shoes. The Ne"v Balance Workforce­ A Key to Operationsl111prove1nent

The Davises believed that improvingthe produc­ tion process at New Balance req uired widespreadinitiative and involvement from the company's front line workers.Before joining the New Balance team, these manufacturing employeeswent through a lengthy selection process. New Balance screenedpotential employees for their professional or per­ sonal experiencein team-based environments. For example, the company often lookedfor employ­ ees who had played team sports in high school orcollege. New hires were paired up with an experienced employee,known as a "buddy;' and were placed in a training team for six toeight weeks u ntil they were comfortable enough to go on a regularproduction team. "As soon as new employees come in, we train themin the fow1dations of associate involvement, continuousimprovement, and leadership," Anne Davis explained, "but we don'twant to put them immediately into an existing team and have themintimidated by the skills that the more experienced members alreadyhave." Anotherimportant  feature  of  the  company'sU.S. workforce was that it was not unionized. Some employeesperformed two or three jobs on teams-a feature that would not bepossible under a strict job classification system. "If one area ofthe factory is slow and the other one is loaded up," Anne Davisexplained, "people willingly go to the next area to make theirnumbers for the day,and we would not be able to do that if theywere unionized." "It's a flexibility issue. The factories arealways changing," Jim Davis explained. "The folks on the factoryfloor are always pushing us to change things so they can do itbetter. We would n't be able to do that if we were unionized." Headded: Annie and l are constantly amazed at howflexible these folks are, and how engaged they are in what they'redoing. They go home, and they come to work the next day thinking,"How can 1 do things better? How can [ be moreproductive?" And what we're trying to do is get the whole companyto think that Beyond the organization of the workforce,compensation also played a key role in the abil­ ity of NewBalance's management to leverage em­ ployee knowledge andinitiative. A few years ago, New Balance briefly moved from individual-based hourly wages to team-based piece rates, but then quicklymoved back to the hourly system. Jim Davis explained:

Teammates put too much pressure oneach other under the team-based compensation system. If one personwas out of work because she had a sick child at home, there wouldbe too much pressure on the rest of the team to perfo1m, and shecame in feel­ ing guilty the next day. So we have also a culture ofmutual respect here, and we sat down with ow· supervisors and wetalked about how we might bet­ ter accommodate these people, andone of the things that we came up with was hourly pay. We did apilot run for a month or so, and we found that the produc­ tionwhen we were compensating them on an how·Jy basis was equal lo ifnot better than under the team­ bai;ed piecework system.

Anne Davis added that themaintenance of hourly compensatio n helped gain support for con­tinued training of the workforce. "Under the team­ based rate, manysupervisors saw training as another project, as taking their peopleaway from the job;' she said. '•With hourly pay they were morewilling to send poople to training, and by doing training early on,people know right away whether or not they fit in the company."

LEAN MANUFACTURING ­NEW BALANCEEXECUTIONAL EXCELLENCE (NB2E)

In 2004, New Balance began NewBalance Execu­ tional Excellence (NB2E) to apply the principles ofthe Toyota Production System (TPS) to shoe produc­ tion. One of thekey goals of NB2E was to further reduce the lead time from aretailer's order to its delivery. Tompkins clearly stated hisobjective for NB2E:

Our goa l is I 00 percent deliveryof requested prod­ uct within 24 hours. It may be impossible, butwe are going to\ ork toward something very, very close to that-toa position "here, for that two or three percent that \ e can'tdeliver within 24 hours-we can ce11ainly replenish within. say,four days al the most. And that would be only for the worst-casescenario where we got completely surprised by an order.

According to Tompki ns, an essentialcomponent of NB2E would be to move the company's manu­ facturingplants from batch production to single-pair flow. He added:

Over a period of time I would liketo know that when a part of an u pper gets cut to what pair ofshoes that part is heading. . ..And we might be making severaldifferent models in a given factory on a given day, but we wouldstill know that that pru·t right thereand the one in the ot her factory over there are going to end up ina shoe that is put on tliat trailer heading tothat cu tomer.Thal is where I would like lo get to.

Before NB2E, to improve productavailabi lity, New Balance was required to resort to what Spivakcalled "brut e force" by greatly increasing finished goodsinventory. For the compa ny's flagship shoe, the 991 , inventorywas doubled to ensure availability for all colors, sizes, andwidths. Though there was a significant increase in sales of the991,the inventory cost was very high.

If N B2E were to besuccessful-approaching Tompkin s' goal of I 00 percent availability within 24 hourswhile reducing inventory levels-manufacturingcycle times would need to be dramatically reduced. These changesrequired complete realignment of factory operations. Spivakobserved:

0lll' factory had a classk a1rnngement with a cutting, an embroidery. a stitching, and an assembly depait­ ment. Each department did their particular tasks forall styles, and t he factory worked on a batch basis. To 1ealignthat under NB2E would require a big change. Instead of moving aday's worth of production, we needed to move toward a morecontinuous flow. Doing this would require us lo reduce work inproc­ ess significantly and get the line associates and su­pe1visors to embrace that change. The real challenge would be lokeep making shoes every day while thistransformation Vaongoing.

THE MARATHON

G limpsing the brilliant evening sunoutside their kitchen window, the Davises could not imagine a morefitting time for reflection. Though New Balance traditionally hadcompeted on the basis of its manu­ facturing, service to retailers, and its ability to build loyalty among a core set ofcustomers for its high­ margin, long-lived shoe models, 2005 hadnot been a stellar year mostly beca use of operational issues. "Wedid a very poor job of executing i n the first half of the year," Jim Davis noted. "We had a lot of qual­ ity problem s, late deliveries, late samples, which in­ hibited the effectiveness of oursalespeople." To Jim Davis, the answer to the company's problemswas "basically doing everything we've always done be­ fore, onlydoing it better."Yet as New Balance grew well beyond $ I billion inrevenue, the question of scalability came up.