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Breeze Technology, Inc.
3. Strategic Options

Two main strategic options were identified. Breeze might manufacture shoes incorporating the technology or, alternatively, license the technology to one or more current operators in the footwear industry.

3.1 Manufacturing

The manufacturing option would require Breeze to source large amounts of venture capital through equity partners, seeking debt on the open market, or through a joint venture (perhaps with one of the current footwear manufacturers). This venture capital would then be used to undertake the R&D necessary to identify the specific materials and associated manufacturing requirements. The expense of researching, designing and commissioning production processes and tooling would also have to be met. The manufacturing option would require that Breeze enter into a highly competitive arena with the current footwear manufacturers, all keen to retain market share in a mature market. The business and financial risks of this option are substantial.

3.2 Licensing

Licensing, on the other hand, requires relatively little capital up front and would establish Breeze in a strategic alliance, rather than an adversarial relationship, with at least one of the footwear manufacturers. Licensing will accelerate the process by which the technology becomes accepted as the industry standard. It will also allow access to markets that would not otherwise be accessible. In other words, while it is possible to enter the US athletic shoe market via the manufacturing option, Breeze could not simultaneously introduce the technology to the major international markets (no less the other segments of the footwear market). Licensing allows Breeze to simultaneously enhance the competitive position of its licensee while providing immediate net gains to its owners. A licensee would build and stimulate demand, provide brand name recognition for the technology and share the costs of pioneering. A large and financially strong licensee would also vigorously defend against theft of the intellectual property.

In short, it is substantially more promising to license the technology to one or more operators in the industry. At the same time, Breeze is cognizant of the pitfalls of licensing. It creates a direct competitor by giving access to the firm's competitive advantage. It provides short term profits but may adversely effect long term profits. Most importantly, the licensor may be vulnerable to attack from the licensee. In light of these issues, Breeze will position itself defensively to minimize its vulnerability to these threats.

3.3 Licensing Protocols

Various licensing protocols were investigated. There might be a large initial payment followed by relatively modest royalty payments, or the converse. An outright sale of the technology is simply the extreme case (with a large initial payment and zero royalty rate). Royalties might be based on, for example, the annual value of wholesale invoices, a fixed royalty per pair of shoes, or a percentage of gross revenues plus a percentage of any increase of market share accruing to the licensee. It was determined that Breeze would attempt to negotiate a flat fee per period for assignment of the technology, with a royalty rate based on the licensee's wholesale sales at invoice cost (for shoes incorporating the technology) to be applicable beyond some minimum level of sales revenue. Thc size of the flat fee and the minimum sales revenue target would be negotiated to allow a strong inducement for the licensee to integrate the technology quickly throughout the firm's product line.

Exhibit II indicates the strategic choices made. The preferred strategy is to approach one of the market leaders in the athletic/casual market and seek to license the technology to that party. If success is not achieved with one of the major manufacturers, the backup strategy is to approach several smaller manufacturers and marketers and offer them the opportunity to adopt the technology in an effort to steal market share from the majors. Finally, if no existing manufacturer is willing to license the technology at reasonable rates, Breeze as a strategy of last resort, will enter niche markets as a manufacturer of footwear products with potential expansion later into mainstream lines. If the technology is licensed, Breeze expects to begin manufacturing (of other product innovations) in year three, in any case.

Exhibit II: Market Segments, Strategic Options and Target Markets

Broad Market Segments

Strategic Option Dress/Fashion Casual/Athletic Special Purpose

Manufacturer

   

 

3

Exclusive License

To a

Market Leader

Diffusion

1

Diffusion

License to several

smaller shoe

companies

 

2

 

 

3.4 Target Market

It was necessary to identify manufacturers that may be interested in the Breeze technology. Our preliminary analysis of thc footwear market identified the major manufacturers and their respective market positions. As shown in Exhibit III, there are two major players in the US athletic/casual footwear market, followed by a half dozen smaller players. Internationally, Adidas and Reebok are each larger than Nike; Puma also has a relatively large share outside thc US market.

 

Exhibit III: Major Athletic Shoe Manufacturers in the US Market


Market Share (%)

In 1993, the total retail value of athletic/casual shoes in the US market was$11.6billion(see Appendix VI). Nike, for example, is responsible for nearly $4 billion in sales at retail and over S2 billion at wholesale in the US market alone. Nike are also the leaders in market segment diversification, having the most comprehensive range of products. Nike is seen as a performance brand first and fashion statement second. Reebok (with 28% of the market including their subsidiary Avia), has a fashion/life-style image rather than one of performance. Reebok is currently in transition mode, attempting to become more focused on their marketing with a broader product line within the casual footwear market. Their non-core businesses are for sale and it remains to be seen if their new strategy will bear positive results. Both Nike and Reebok are experiencing a maturing market for athletic/casual shoes and as a result each have diversified into apparel and sports equipment in an attempt to maintain overall growth.

Of the minor brands, Keds is thc market leader in the children's footwear segment. They are currently in a turnaround situation and are concentrating on keeping their brand attractive to top retailers. LA Gear is in the middle of a major restructuring. They have traditionally produced fashion-oriented products and are currently repositioning themselves at the lower priced end of thc market (below $65). The remaining competitors are aggressively seeking share through product innovation and heavy advertising campaigns. In a June 1993 report on the industry, Shearson Lehman Brothers stated that Nike was the best placed company in the industry to take advantage of any rebound of the depressed economy that was largely responsible for thc poor trading conditions. Shearson also stated that Nikc products and marketing strategies were already well considered and in place, in marked contrast to their competitors.

On the basis of this analysis, and on advice from other key sources in the US, one major US manufacturer has been approached. Discussions with this company are ongoing and several follow-up meetings are planned.


Breeze Technology, Inc.
Table of ContentsAppendices
0. Executive Summary
1. The Company
2. Market Analysis
3. Strategic Options
4. Marketing Strategy
5. Research & Development
6. Organizational Structure
7. Risk Reduction Strategies
8. Exit & Harvest Strategies
9. Financials
10. Summary
I. Focus Group Analysis
II. Competitor Content Analysis
III. Product Test Results
IV. Inventor's Test Results
V. Resumes of Directors
VI. US Market Data
VII. Technical Drawings


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