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Essay: Nike Innovation and Profitability Analysis: Gross Profit, ROA, and More

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Final Case Individual(Nike)

MGMT 489-10 & 11

Professor Raed Elaydi

Strategic Management

Fall 2017

Final Case Individual(Nike) 1

Executive Summary 3

Financial Analysis 4

Financial Summary 7

Structure Conduct Performance Analysis 8

Porter’s Five Force Analysis 9

VRIO Analysis 11

Strategic Vision and Guidelines 12

References 13 Executive Summary

Nike is an American multinational company which is one of the world's biggest

providers of athletic shoes and clothing and a noteworthy maker of games hardware. The organization was established in 1964, as Blue Ribbon Sports by Bill Bowerman and Phil Knight. Nike items are comprehensive of Nike Golf, Nike Pro, Nike+, Air Jordan, Air Force 1, Nike Dunk, Nike Skateboarding and its auxiliaries image including Hurley International, Jordan, and Converse. Nike offers a collection of items, including shoes and attire for sports exercises, to be specific football, American football, ball, running, battle sports, tennis, golf, and cross trainings for men, ladies, and youngsters. Nike offer indoor games exercises, as well as offers results of outside exercises, for example, skateboarding, baseball, cycling, baseball, volleyball, cheerleading, wrestling, oceanic exercises, and other recreational items. It is notable in youth culture and hip jump culture for its urban mold garments.

Mission Statement: “Bringing inspiration and innovation to all”

Nike's items can really be utilized by everyone on the planet. Extending from the shoes to garments and different games clothes, subsequently if Nike utilizes the term ―athlete clients who do not frequently play games won't feel that he or she is a piece of Nike.Even though Bill Bowerman have said ―If you have a body, you are an athlete, but the it still emphasizes on the athlete. Therefore by improving the mission to ―Bringing inspiration and innovation to all it focuses on how Nike still bring inspiration and innovation continuously and to all which means everyone globally.

Nike’s corporate strategy focuses on innovation and emphasis on their research and development in order to be profitable in long run, reduce or eliminate athletes injury and help in athletic performance and maximizing their comfort. It’s competitive advantage is in its technology, manufacturing skills, strength of patents and they wholly own five footwear and apparel companies namely Cole Haan, Converse Inc., Hurley International LLc, Umbro Ltd., and Nike Golf.

Financial Analysis

Return On Asset(ROA%)

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings. Return on assets is displayed as a percentage and its calculated as:

ROA = Net Income / Total Assets

Nike Inc has been generating the highest ROA amongst its competitors. Not only have they been leading they’ve also been increasing their ROA year by year by generating greater income. Adidas and Puma haven’t been generating good ROA since their Net income is low over the years. In 2015, Puma had the lowest Net income of $37.1 million in comparison to Adidas of $741 million and Nike’s $3273 million. Nike’s net income increased from 2015 to 2016 due to the launch of The 2015 Nike Mag. This was an innovative concept they cam in with in their footwear. The shoes would provide on demand support and comfort with its technology. The sales of Nike went up in the anticipation of the shoes as well as when they were launched and delivered .

Inventory Turnover Ratio

Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period of time. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. It is calculated as sales divided by average inventory.

Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory

Nike has the best results in terms of Inventory Turnover Ratio as well. Nike’s ITR fell from 2015 to 2016, however currently in 2017 it has  increased to 3.85 which is not quite as good as 2015 but it’s improving.Under Armour has a great inventory turnover ratio as well.  Like Nike their ITR fell from 2015 to 2016 as well. However they have had a fluctuating ITR since years due to poor management of inventory.

Debt Equity Ratio

Debt/Equity (D/E) Ratio, calculated by dividing a company’s total liabilities by its stockholders' equity, is a debt ratio used to measure a company's financial leverage. The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. The formula for calculating D/E ratios is:

Debt/Equity Ratio = Total Liabilities / Shareholders' Equity

In the fiscal year 2016, Nike repurchased a total of 55.6 million shares and hence their current ratio as well as debt equity ratio rose. Under Armour has the second best debt to equity ratio. The ratio ha seen increasing for them since 2013 and has been the same in the past two years which means they’ve been consistent with their shareholder’s equity and liabilities.

Gross Profit Margin (%)

The gross profit margin ratio, also known as gross margin, is the ratio of gross margin expressed as a percentage of sales. Gross margin, alone, indicates how much profit a company makes after paying off its Cost of Goods sold. It is a measure of the efficiency of a company using its raw materials and labor during the production process. The value of gross profit margin varies from company and industry. The higher the profit margin, the more efficient a company is. This can be assigned to single products or an entire company.

Gross profit margin = Gross profit ÷ Total revenue

Under Armour’s Gross Profit margin fell from 48% to 46% in 2016 due to it’s efforts at managing it’s inventory in North America. UA has been trying to manage it’s poor inventory management by financing money in that area which led to a lower Gross profit. Nike on the other hand increased from 46 to 47% in 2016 since it’s been doing really well with it’s total revenue, which is highest in the industry. It’s average grows margin has been close to 44% in the past 5 years. Even Adidas and Puma are doing just fine with their Gross Profit Margins.

Return on Invested Capital(ROIC%)

The return on invested capital (ROIC) is the percentage amount that a company is making for every percentage point over the [Cost of Capital|Weighted Average Cost of Capital (WACC). More specifically the return on investment capital is the percentage return that a company makes over its invested capital. However, the invested capital is measured by the monetary value needed, instead of the assets that were bought. Therefore invested capital is the amount of long-term debt plus the amount of common and preferred shares.

ROIC=Net Operating Profit After Tax (NOPAT)/Invested Capital

Nike Inc has the highest ROIC in the market. It has shown an increasing trend in ROIC which tells us that they have been making great profits without adding any new investments. Adidas has the second best ROIC and like Nike they’ve shown an upwards trends in the ratio too. Puma has the lowest ROIC since they’ve been investing a lot to generate greater market share as well as profit, however their profits are not improving as a result of these investments. Under Armour has been showing a deceasing returns since it has been restructuring it’s management.

Financial Summary

Nike Inc is a public company and is a part of monopolistic competition. The reason for it being monopolistically competitive is that it has aspects of a perfect competition, except its products are not like competitors.

The famous swoosh logo of the company was created in 1971, nine years before the company went public.

In the year 1986, Nike’s revenue passed $1Billion for the first time.

If someone had invested $1000 during Nike’s Initial Public Offering(IPO) without reinvesting dividends, that investment would have been worth $729575 in 2015.This represents the Compound Annual Growth Rate(CAGR) of just over 20.7%.

The original $1000 shares would have yielded almost 87 shares. Adjusted for stock splits, that would be 5568 shares without reinvesting dividends.

The company has employed 74400 employees worldwide in 2017.

The company’s global revenue is 34 billion dollars.

The footwear segment generated about 9.7 billion U.S. dollars.

Between the competitors Nike Inc. has the highest Gross Profit Margins as well as ROIC which means they’re generating higher profits without additional investments in the company, which is a great sign of profitability and returns.

Structure Conduct Performance Analysis

Structure

As discussed earlier Nike Inc is a public company and is in a monopolistic competition since it has aspects of perfect competition but the products they sell are not similar to their competitors. There are several reasons as to why it is a monopolistic competition. First, it is characterized by product differentiation. Second, it has profit maximization concept where in companies expand production its production until it’s marginal cost is equal to marginal revenue. All this features exist in a monopolistically competitive industry as it does for Nike Inc.

Conduct

Conduct here is strong Product Differentiation. Product Differentiation is the real or perceived differences between competing products in the same industry. Nike’s business model is simple “Offer higher quality materials and the customer will be willing to pay higher prices .”

Performance

Due to it’s product differentiation strategy Nike has an above average performance that leads to higher profits as reflected in it’s financial performance.

Porter’s Five Force Analysis

Threat of Rivalry

The threat of rivalry amongst existing competition in the athletic shoe apparel and equipment  industry is high. Large firms such as Nike, Reebok, Adidas, Under Armour etc have grown immensely and have established their foot firmly. These firms are also largely recognized globally and have a loyal customer population. The firms also engage in online selling which further increases their sales while minimizing operating costs. The giant firms of the industry invest heavily in building brand image and therefor the competition in the industry is quite high. Nike deals with this threat by continuously investing in Research and Development to provide comfort and maximize athletic performance. They have patents on several of their products such as Nike Air, Nike Zoom, Nike Airmax and more. These new and innovative products along with their low manufacturing cost makes Nike the market leader in the segment.

Threat of New Entrants

The high cost of brand improvement makes it difficult for new participants to prevail with regards to going up against huge firms like Nike Inc. Likewise, the high economies of scale furnish Nike with an aggressive edge against new entrants, considering the organization's worldwide production and distribution network for its athletic shoes, clothing and hardware. The moderate cost of  capital and establishing the business further limits the threat to new entry.In light of this component of the Five Forces Analysis, the threat of new entrants is a minor worry for Nike Inc.

Threat of Supplier Power

The threat of supplier power is low in case of Nike since there is high overall supply, large number of suppliers and moderate size of individual supplier. The overall supply in the market is pretty high and the raw materials and equipments are available in abundance which leads to no limit on supply for Nike. Another factor is the number of suppliers, which again are plenty to choose from. It gives Nike the benefit of low switching cost in case one supplier doesn’t work. Due to the number being higher it gives supplier little power over Nike.

Threat of Buyer Power

The low switching costs make it simple for consumers to purchase products other than those from Nike. The direct accessibility of substitutes additionally empowers consumers to purchase different items rather than continually purchasing from Nike. Nonetheless, the little size of individual clients limits their individual powers on the organization. These outside elements prompt the direct bartering energy of clients. This component of the Five Forces Analysis demonstrates that the power of clients is a noteworthy thought in Nike's systems for the athletic footwear, apparel and equipment market.

Threat of Substitutes

The threat to substitute in Nike’s case is moderate. There’s a reason why it’s neither low nor high. It’s not low since there’s a lot of other things customers can buy instead of Nike products. They can go eat at the restaurant or buy books instead of shoes or apparel. However, there’s another aspect to this which is need. Most of the people need shoes and work to clothes and accessories, Nike provides the best quality that is durable and does justice to its high prices. Therefor, customers are attracted to buying Nike over competitors such as Adidas and Puma. So overall the threat to substitute is moderate.

VRIO Analysis

The VRIO Analysis is basically an evaluation of company’s resources. In Nike’s case the three main resources that add to it’s value are Technology, Manufacturing and Patents. The first is Technology, which provides them with a Temporary Competitive Advantage. Nike has the most cutting-edge products in the market. Technology helps the customers to connect their iPod devices to sensors in the shoes to record time, distance, pace and calories burned.

Second is manufacturing skills. They use low cost manufacturers based outside the USA, outsourcing to Asia. This leads to massive economies of scale. Economies of scope and customization. This component is valuable, rare, costly to imitate and non-substitutable, therefor this is their sustained competitive advantage.

Third is patents. Nike has the most innovative products and design in the market. They have a Nike Sports Research Lab(NSRL), which was established in 1980, Exeter. Athletes, Scientists, Engineers and Designers converge to develop key performance there. Their main focus there  is on biomechanics, physiology, perception and athletic performance. There’s 3D motion capture facility there to collect data. All these technology provide foundation for Nike’s innovation. And therefore, they have many patents registered under them for products such as Nike Air, Nike Airmax, Nike Zoom, Nike Shax. And Patents are valuable, rare and costly to imitate so this is one of their very important competitive advantage.  

Strategic Vision and Guidelines

International Expansion

Although Nike Inc.’s half the sale come from outside the country, there’s still scope of growth for Nike, internationally. Nike’s sales in China jumped unto 17%, after adjusting the currency fluctuations. The Greater China is a huge market place for athletes specifically. There’s so much more scope to expand there.

Another major segment is Europe, which is currently Nike’s biggest international segment. They have a growth of 12% after adjusting the currency fluctuations. They still need to overcome the threat of competition from Adidas in Europe, considering Adidas is a European brand.

Focus on Apparels

Nike’s majority sales comes from their footwear segment. They have been doing extremely well in this segment and it is one their power segment. However, the focus on this segments takes away the focus from apparels and other things Nike. They can innovate more in clothing line with their Research and development team being huge.

References

www.investopedia.com

www.gurufocus.com

https://www.stock-analysis-on.net

https://about.nike.com

Barney, J. B. (2014). Gaining and sustaining: competitive advantage. Harlow: Pearson.

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