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Essay: Beating the Competition: The Inside Story of Nike, Inc.’s Success

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Nike is an American Corporation that is involved with worldwide sales and marketing of footwear apparel and accessories. The headquarters are in Beaverton, Oregon. Bill Bowerman and Phil Knight founded the company in January 1964 as Blue Ribbon Sports. The company officially became known as Nike, Inc. on May 30th 1971. The company is named Nike after the Greek Goddess for victory. (Nike, Inc).

Nike is world famous owing to the marketing campaigns as well as celebrity endorsements from high profile athletes e.g. Micheal Jordan and Roger Federer. (Chung, 2013). The trademark slogan ‘Just Do It’ and the famous ‘swoosh’ logo are renowned all over the world.  The world famous Nike is involved in designing and selling shoes for a variety of sports and sponsoring events like NFL Super Bowl. Nike also sells athletic apparel, casual shoes and sporting equipment. Nike brand names and trademarks include Nike Pro, Nike+, Air Jordan, FlyKnit and subsidiaries like Converse.

During the global economic crisis, Nike reacted by taking advantage of the “Just Do It” campaign. Sponsoring sports stars to express determination, passion and humour, giving people more courage and psychological comfort in the face of economic crisis. Nike’s focus is also about family, particularly in Asian countries that can provide emotional support to each other. As shown in Figure 1, the main competitors for Nike are Adidas, New Balance and Skechers.

Figure 1: Athletic footwear market share worldwide in 2015 (Statista.com website)

As seen in Figure 1, Nike is the clear market leader, with worldwide sales of over 32 million US Dollars, shown in Figure 2. Nike’s strongest markets and sources of highest revenues are North American and Western Europe as shown in Figure 3. Nike is also concentrating on the Chinese and Emerging Markets owing to a growing young population and the need to stay healthy and keep fit.

During the global economic crisis in 2009, Nike remained the incumbent as can be seen in Figure 4. Nike’s revenue declined during 2009 and 2010. From Table 1, the operating margin and net income in 2009 declined. Although Adidas have retained second position for a long time, Adidas and other leading footwear companies have a long battle ahead of them.

As the products sold by the competitors are not unique. Nike’s success lies in being innovative with the technology as well as strong marketing and powerful celebrities acting as role models, thus enabling Nike to continue retaining the number position and market share.

2. Vulnerability

Nike, Inc. has an outstanding reputation for designing and not manufacturing their products. The manufacturing is outsourced and Nike employs subcontractors to perform specific tasks in the project. The manufacturing facilities are mainly located in Asian countries.

From Figure 5, Nike will demonstrate some type 1 vulnerability owing to owning administrative buildings. New Balance is the only athletic shoe manufacturing company to operate a US manufacturing facility, and as a result will have a higher type 1 risk.

As mentioned above, Nike does not own any manufacturing facilities as this is all outsourced. However, Nike will be under pressure from other costs in the business. Nike will be subject to high Type-II vulnerability as costs of materials will differ from country to country. As the manufacturing is performed outside of the US, Nike is exposed to exchange rates, inflation rates and prices of the commodities and will be explored further below. (Lund-Thomson, 2015 and Distelhorst, 2017).

Outsourcing has become tremendously popular as the mix of low wages and costs can maximise profits. Nike and other footwear companies do this as this is to largely reduce costs and mitigate the project risks. The cost of shipping has dropped because of increased efficiency in shipping technologies. Outsourcing has also become popular because of the free trade agreement between North America and international countries.  

Although efficiencies are gained, Nike will face difficulties monitoring the quality of the goods produced and the regulations of working conditions in the respective countries of operation. As can be seen from Figure 6, Nike has over 744 factories worldwide, and over 1 million contracted labour workers. Nike has come under harsh criticisms of the so called ‘sweat shops’. Nike should concentrate on their core competencies like, designing; future product development and marketing campaigns that will help them maintain the number one market leader position.

Nike managed to turn the image around, although this has not been completed. Nike recognises that continuing in this pathway, can only lead to brand damage and loss of credibility. Nike now utilise expatriates to monitor the quality of the goods produced along with the factory conditions for the employees. Nike also implemented a code of conduct in 1992, which is mandatory across the world. This is very difficult for Nike to control as they do not own any factories as they are owned by the sub- contractor. Nike has distribution centres in the US, Memphis and a few others on a lease basis. Nike always argues that without having these factories, no jobs will exist for these individuals. These people in developing countries will never have the opportunity to earn an income and become independent. (Lund-Thomson, 2015 and Distelhorst, 2017).

An estimation of Nike’s direct employees is ~ 5%. The contracted employees are paid low wages as these are manual positions. Therefore, Nike has low costs for redundancies and the costs to recruit will be low. People in these developing countries need to work, and stay in employment.

3. Market Exposure

The market of shoes has always been competitive and a number of substitutes are available. Consumer’s expectations and choices have increased and require more designs as well as being fashionable. Nike’s strongest competitor is Adidas with number 2 position. However, Sketchers have recently been fighting back and have recently taken number 2 position in the US markets. From Figure 1, although there are many athletic footwear companies, entry barriers are low. Multiple companies can enter this market, as there only a few leading sportswear companies, new starters will find it difficult to gain market share and raise finances for advertising and paying high profile celebrities.

Consumers will always have an impact on demand and this will result in an increase in the demand curve. The US and Western European markets have long favoured Nike products. The number of consumers available to purchase the products is high. As the consumers of Nike products goes up, the demand curve will shift to the right hand, from D1 to D2 and the quantity will go up from Q1 to Q2 as shown in Figure 8.

However, the opposite effect can occur, particularly during harsh economic times and as multiple substitutes are available at reduced cost. This has the effect of moving the curve to the left hand side, from D1 to D3 and quantity from Q1 to Q3.

In Figure 9, the supply curve demonstrates that when there is a right hand shift from S1 to S2 the quantity will increase from Q1 to Q2. As the prices of the raw materials decreases, this results in decreased production costs. The opposite can also take effect and when taxes and salaries increases, the supply will shift to the left from S1 to S3 and quantity will move from Q1 to Q3.

There is huge demand for Nike and will always be governed by the law of demand. Nike is a substitute product, and when economic times are difficult consumers have a choice to switch to alternatives. In figure 8, when P1 moves to P2, the quantity will decrease from Q1 to Q2. Demand is also affected by fashion trends, number and price of substitute products and income in respective countries and economic stability. (Begg and Ward, 2013).

The Law of Supply shown in Figure 10 is the relationship between the quantity that is supplied and the price of the product over a period of defined time. For e.g. A limited Nike special edition product. The cost of producing the goods will have an impact on Nike’s ability to supply. In Figure 6, Nike has the greatest number of factories in Vietnam, China and Indonesia. Nike will have to pay close attention to the economies in the outsourced countries. Natural disasters can also have an impact on output and supply of raw materials for e.g. Tsunami in Thailand and India. Although, Nike deal with contractors, if suppliers feel that prices of raw materials can increase, in some cases they can deliberately withhold stock and sell when prices increase. As a subsequent result, Nike will be forced to reduce the supply as there are other substitutes available and the elasticity of demand will decrease. (Begg and Ward, 2013).

From Figure 11 an equilibrium will be established and the consumers demand and ability to produce will be equal. If the demand and supply is above the equilibrium, then Nike is in surplus, and if below will be in shortage of supply. As explained, Nike is in an elastic industry. Nike will be unlikely to benefit from an increase in prices and revenue will decline. This is why Nike spend money to increase consumer brand loyalty and convert demand to be inelastic. There are many competitors and consumers can alternate to any other supplier at any time. Income and economic factors greatly influence purchasing these products. The income of consumers (See Appendix II, p 22) will affect an individual’s decision to purchase Nike shoes. Nike shoes are seen as high quality, superior brands and are ‘worth it’ to the consumers to spend money. Nike is also in an Oligopoly market as there are multiple companies producing the same types of product. Although the barriers to entry are low, Nike has a lot of power when it comes to the price of the products. These companies will compete based on different styles and compete in a range of sporting categories to win market share. (Begg and Ward, 2013).

4. Micro and Macro Economic Exposures

Nike’s target audience has always been middle – class age groups that are interested in sports and fashionable athletic sportswear. Nike is also interested in growing it’s market share in the female demographic. China also has a growing economy, and a young generation. Chinese people are starting to eat healthily and look after their bodies. Nike has continued to retain their loyal consumers as well as attract new customers, Nike stays ahead of the game because of it’s innovation and commitment to technological advances. (Xing, 2016).

As explained above in section 2, Nike outsources all of it’s manufacturing and as a consequence has been subjected and continues to receive strong criticisms regarding ‘sweat shops’. As a result of this, Nike tried to be honest and disclose manufacturing sites as well as monitor these factories regularly. However, Nike is still exposed and has very little control over employment laws and health and safety regulations in foreign countries. Nike also needs to be mindful of poor product quality and inconsistent manufacturing. (Knight, 2002).

The Nike brand is worth $ 15.9 billion dollars (excluding Cole Haan, Converse, Umbro and Hurley). Multiple campaigns and anti-sweatshop groups target Nike and this can potentially be very damaging to the Nike’s image and brand. Nike strives to maintain sustainability and promotes this culture strongly via the corporate website. Nike also has strong collaborative relationships with Apple, which yielded the Apple Ipod product. Nike is due to partner with Amazon and remove the sales from the retailers. Nike can gain better control of it’s product sales and prices. A growing trend of millennials and generations Y and Z are purchasing clothes online, particularly Amazon. Nike wants direct exposure to a growing and popular distribution channel. (Issa, 2016).

PESTLE Analysis (Macro Economics)

Nike’s motto is “If you have a body, you are an athlete”. In advocating this motto, brings inspiration and innovation to every athlete all over the world. Despite being the market leader, Nike should take care. In a growing market and economies changing all over the world, Nike must not become complacent.

Political, low interest rates and tax agreements can benefit Nike. Political conflicts can also make it difficult for Nike to import and export products.

Economical, as explained earlier in this report: unstable economies are potentially bad news for Nike. However, as economies change, employee wages increases (See Appendix I, p 21) and the cost of raw materials increases, Nike will have to re-think it’s strategy.

Social, good public relationships and maintaining this is very important to Nike. The growing use of social media and online resources to voice opinions is good and bad for companies like Nike. With certain countries dealing with an ageing population, Obesity and Diabetes, Nike can work with individuals to lead a healthier lifestyle.

Technology always affords the ability for Nike to innovate and create designs for consumers to benefit and enjoy. Nike ID, where customers can personalise their footwear. The increased use of online shopping and contact-less payments, Nike can make use of this. Offering platforms for consumers to purchase their products anytime and anywhere, however, this reduces the workforce required. (Nike.Inc).

Legal, Nike (although not alone in this), owns multiple foreign subsidiaries to minimise the tax payments. Nike has also been subjected to controversy over the false claims regarding the Nike’s Kobe Basketball shoes. In 2014, Nike and Adidas were investigated for forming a cartel. Nike and Adidas made a decision to supply outlets and eliminate business with smaller retailers. In 2017, Nike is also subjected to anti-trust investigation and distribution over the Futbol Club Barcelona merchandise. Competition rules prevent traders from selling licenced products online with EU single markets for superior deals. (Evening Standard, 2014 and Investors.com).

Environmental, sustainability is very important to Nike and promote this heavily on their corporate website. Nike worked hard to reduce carbon emissions and eliminating waste by moving to lean manufacturing to improve efficiencies. Nike are also putting practices in place for the factories abroad, and making them more environmentally friendly. 9Nike, Inc).

Non-Economic Factors

There are multiple unpredictable non-economic exposures that a business can succumb to. As Nike has majority of it’s factories in China, the impact of SARS in 2003 on the Chinese economy was devastating. A huge threat to US and the global economy is terrorism. This can potentially reduce investment in certain countries and impact on employment and the ability to trade. (Hangbin et al, 2012).

Natural disasters like Tsunami, hurricanes and earthquake are devastating to any economy and business. The unnecessary loss of lives, damage to buildings, personal possessions lost forever. The victims of natural disaster can never free themselves from life-long scars. Manufacturing sites and employees lost and scarcity of raw materials required to produce the goods, along with loss of communication and logistics. Unemployment can create severe decreases in consumer spending and may alternate to cheaper products.

Maintaining a healthy lifestyle is advertised all over the world as Diabetes and Obesity increasing, particularly amongst the younger generation. Nike can benefit from working with health professionals and getting people more active can turn this around and increase market demand. (Bouchard, 2015). Environmental factors like the weather can have an impact an employee living in rural areas. Employees may be unable to arrive at work, particularly in periods of monsoon.

5. Protection from External Economic Shocks

Although the outlook for Nike is strong and they are the market leaders, Nike has to be careful about its financial targets and achievements of corporate goals. Although Nike gets its primary revenues from Western Europe and North American markets, Nike also derives revenues from overseas markets. As with all major footwear companies, outsourcing is common in the industry. With increases in cost of labour, raw materials and currency fluctuations, Nike can suffer and profits may decline. China, Brazil, Russia and Japan are also growing markets for Nike, however with currency depreciations versus the US dollar, Nike’s profits will be affected. Nike may be forced to increase prices to compensate for this, however, customers will not be happy.

Nike leads the market and dominates strongly; Nike’s rivals are catching up. Companies like Under Armour, Adidas and Sketchers are trying to present their company image by offering premium footwear like Nike and steal market share. However, all these rivals have got a long way to go building the brand and reputation that Nike has.

Nike has always continued to invest in R&D and innovate with technology. Nike must continue to do this to retain market share and appeal to it’s consumers as a premium footwear brand. Brexit and economic downturn in any country exposes companies to uncertain times. Financial constraints may even force loyal Nike customers to choose lower cost alternatives.

6. Conclusion

Although Nike has numerous competitors and may face profits being reduced owing to economic instability – Nike’s future is strong. Despite the recession is 2008/2009, Nike was still the number one and achieved growth. Nike didn’t step away during the economic crisis, instead, it make use of it’s famous slogan “Just Do It” and promoted people to stay determined, humour and comfort during the global economic crisis. High profile sporting celebrities that promote Nike motivate and inspire young people, to be better and one day emulates these big named celebrities. Nike has also reaped the benefits of emulating the famous Toyota’s lean manufacturing approach. This has led to Nike having fewer product defects, delivery times have increased and productivity amongst staff has improved. New Balance is an American footwear company that is proud to be manufacturing footwear in the US and made by Americans. Perhaps, if Nike invests in automation and this was to produce the footwear products. Nike can have better control of the manufacturing and move this to the US. The CEO of Nike, Mark Parker invests in the company and sustainability is very important to ensure the business model delivers profitable growth and can continue to offer their consumers what they want.

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