Nike Strategy Analysis- Final Jun 2010

Nike, Inc. and the Athletic Footwear Industry Strategy and Competition Analysis

Prof. Ben Gomez Casseres By:

Polina Petkova, MBA 2011 Sudarsan Pattabiraman, MBA 2011 5/19/2010

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Firm Overview Nike, Inc. is the biggest manufacturer worldwide of both athletic footwear and apparel in terms of sales. It specializes in the production and sale of athletic footwear, apparel and equipment. For the fiscal year 2009 it announces revenues of about $19.2 billion.1 It is a global company that besides in the US, which accounts for 34% of its revenue2, operates in Europe, Middle East, and Africa. Nike has manufacturing plants and operations throughout Asia. The global slowdown in both sales and consumption in the retail industry affected Nike and it recorded a revenue growth of only about 3% in 2009. Net income fell by 21% and was expected to continue to fall in 2010.

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However, net income in the third quarter of 2010 is

almost double in the net income in the same period of the previous year bringing it up to $496 million.4

Nike’s Global Business Strategy When first founded in 1962 under the name of Blue Ribbon Sports, the strategy was “to distribute low-cost, high-quality Japanese athletic shoes to American consumers in an attempt to break Germany’s domination of the domestic industry.”5 Today Nike offers athletic shoes at every marketable price point to a global market. Nike sustains its leading position through emphasizing quality products, constant innovation, and aggressive marketing. Nike sells its products in more than 180 countries under not only its namesake brand but brands such as Cole Haan, Converse, Hurley International, and Umbro Inc.6 It uses distribution channels such as company-owned stores and websites or sports retailers, such as Foot Locker.

1 2 3 4 5

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Nike, Inc. 10-K, 2009, p. 26. Ibid., p.86 NIKE, Inc. Reports Fiscal 2009 Fourth Quarter and Full Year Results Wikiinvest.com, Nike, Inc. „Strategic Analysis of Nike, Inc.,” DePaul University, March 14, 2000. Wikiinvest.com, Nike, Inc.

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As mentioned earlier, Nike is a truly global company, which means that its success story is transferrable over borders. It divides its sales into four main regions- the US, Europe, Middle East and Africa (EMEA), Asia Pacific, and Central and South America. For 2009 each of these regions accounted respectively for 34.1%, 28.7%, 17.3%, and 6.7% of total revenue.7

Segmentation Strategy: Nike realizes that in order to be number one they need to offer a wide range of products to be able to develop a culture and fulfill their loyal customers’ needs. Nike’s strategy in terms of segmentation is excellent. Their core product is footwear but they also manufacture apparel and equipment and thus, they spread their influence in other sport-related markets. Nike also has several sub-brands to grasp different consumer groups. Nike’s main source of revenue is athletic footwear, which is also its core competency. It accounts for 54% of total revenues. It is designated for running, cross-training, basketball, soccer and it includes even a casual footwear line. Sales in this segment increased by 14% in 2009 from which a big portion was a result of the increase in sales in the Asia Pacific region.8 The second most profitable segment for Nike is apparel, such as t-shirts, shorts, sweatpants, and licensed apparel made specifically for universities with their own logos. With an increase of only 0.2%, apparel sales accounted for 27% of the company’s revenue in 2009.9 However, sales in this segment grew by 14% in the previous period, between 2007 and 2008, due to the growth of 25% of revenues in emerging markets, such as Russia, and other EMEA countries but also a substantial revenue growth of 50% in China.10 Unlike footwear, which main market is the US, the majority of apparel sales come from the EMEA region accounting for 38% of total apparel revenue. 7

Ibid. Nike, Inc. 10-K, 2009, p. 87 9 Ibid. 10 Wikiinvest.com, Nike, Inc. 8

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Equipment, such as balls, golf clubs etc. accounts for 6% of total revenues in 2009 and 13% come from other brands under Nike, such as Cole Haan, Converse, Umbro etc. these different sub-brands supplement Nike product lines. For instance, Umbro specializes in selling soccer apparel and footwear. Nike Golf targets golf players and offers specialized golf equipment, apparel and footwear. Cole Haan on the other hand offers premium dress and casual footwear. Hurley International offers products suitable for snowboarding, skating, and surfing.

Marketing Strategy: Significant role for the competition of market share in the footwear industry plays marketing in order to strengthen the brand image, develop product identity and expand customer loyalty. Competition between players is non-price but rather based on differentiation in brand image and product innovations. Therefore, substantial investments in marketing campaigns are required. Nike invests annually between 11% and 13% of revenue in marketing. 11  Advertising strategy: Nike’s strategy was to create dominant presence in media. Nike

created media presence in several trend setting United States cities. TV ads linking Nike to a city were used, but real drivers were huge oversized billboards and murals on buildings that blanketed cities with messages featuring key Nike-sponsored athletes, not products. The company focuses its marketing on celebrity endorsement, i.e. athletes in basketball, golf, soccer, and tennis. Lately, Nike has also began to sponsor big sporting events so as to create huge awareness and brand following. In 2008, Nike spent significant amount on advertising in the Beijing 2008 Olympics and the Football Championship. After the recent Tiger Woods scandal Nike plans on revisiting it celebrity endorsement strategy. It can be noted that the ‘swoosh logo’ is one of the most famous in the world due to these huge advertising efforts.

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Nike, Inc. 10-K 2009, p.24.

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 Branding Strategy: Nike’s strategy in this front is to develop a premium brand

associated with high quality product that satisfies customer needs. Nike’s brand is associated with an aggressive attitude portrayed by, “you don’t win silver, you lose gold,”12 which clearly suggests that winning is vital. The Nike customer associated the Nike brand with being the ‘American’ way: Being individual and aggressive like Michael Jordan and John McEnroe. Nike built its brand around sports, attitude and lifestyle. Nike backed this strategy with marketing campaigns like “Just do it” and with the companies front athletes like Michael Jordan and Tiger Woods.  Selling Strategy: Nike’s strategy in early 2000s was to develop, flag ship stores,

NikeTown shops in bigger cities, first national, and then abroad. Nike was the first company to establish flagship stores and it turned out to be a sensation. 13 There are independent small retail stores that sell Nike products all around the world as well. Also, on seeing the potential of the low price market, Nike took efforts in 2005 to tap in to the low price segment by striking a deal with big retail discount stores like Walmart and rolled out starter shoes at a cheaper price, competing with private label brands. However, to avoid brand dilution, Nike did not use the swoosh logo in these shoes. Currently, Nike has a high quality website and uses it as an online selling channel. NikeId14, a part of the website allows a customer to customize his own shoes and buy it. The website is available in 14 languages and is different according to the country requirements.

Manufacturing Strategy:

12 13 14

“History of Nike,” Sneakerhead.com Kapferer, “Brand Identity Prism” Nike website – www.nike.com

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Nike manufactures all of its footwear from outside United States. Nike has contract suppliers in China, Vietnam, Indonesia and Thailand15. These countries accounted for 36%, 36%, 22% and 6% of total NIKE brand footwear respectively. Nike also has manufacturing agreements with independent factories in Argentina, Brazil, India, and Mexico to manufacture footwear for sale primarily within these countries. Primary reason for this is that it is cheaper to manufacture in South East Asia and transport it to USA and Europe, regardless of the transportation and tariff costs involved.

Organizational Strategy: With over 21,000 employees worldwide, the company was organized into departments by both geographic divisions and product categories, which created overlapping management responsibilities and a fluid leadership structure. For example, a footwear manager in Europe answered to both the Vice President of Footwear and the Vice President of Europe. However, there was no formal communication link between the regional vice presidents (those in the United States, Europe, Asia-Pacific, and Latin America) and the product vice presidents (footwear, apparel, equipment).16

Human Resources Management Strategy: The sweat shop debacle in late 1990s has led Nike to form a distinctive strategy to provide a good working environment for employees. They have several internal guidelines and compliance standards apart from state laws for ensuring proper working conditions for all workers in its contracted supplier factories. Due to the magnitude of Nike and their number of stores and manufacturing plants throughout the world, Nike has taken the time to recognize the importance of each individual 15

Nike, Inc. 10-K – 2009, p. 4

16

“Expanding the Playing Field: Nike’s World Shoe Project Case,” The William Davidson Institute, January

2002

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and what they can contribute to the team. For this reason, Nike does not call its employees, ‘employees’ but rather ‘team members’ because each part of the team has something to add to the business. They have also admitted that they have a very large array of workers and this brings many diverse cultures and points of views together. According to one of its statement, diversity and inclusion is a crucial factor in Nike’s diplomacy in their many locations and globally. In identifying the differences they have set apart the opportunities to better understand how their teams will work together and what adversity they may face because of this. In order to strive to reach this mission they have put into action these strategies:17 

Cultivate diversity and inclusion to develop world-class, high-performing teams

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Ignite change and inspire critical conversations around diversity, inclusion and innovation

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Create venues and environments for open dialogue, diverse opinions and a multitude of perspectives

All of the above will in future venture apply and assist them in working more efficiently and having more satisfied employees for longer periods of time.

Strategy Analysis To analyze and evaluate the above strategy, it is necessary to understand the internal and external forces in the environment. To begin with, we did a basic SWOT analysis of Nike and then performed an extensive Porter’s five forces analysis of the footwear industry in the US and the emerging markets from Nike’s point of view.

SWOT Analysis: Strength

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Weakness

Opportunities

Threats

Nike Website - http://www.nikebiz.com/company_overview/diversity/

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 Brand Image  Market leader in most of the world  Diverse product portfolio  Strong advertising  Experienced Management team

 Under constant scanner of Human rights companies due to its history of unethical labor practices  Premium player in a price sensitive sector

 Emerging markets  Can be a leader in developing environmentally sustainable business

 Mature industry, susceptible to recessions  Dependence on contracted suppliers – compliance issues  Ever Changing customer preferences  Dependence on endorsed athletes  Seasonal business

Porter’s Five Forces – Footwear Industry in the US & Developed Countries: Threat of New entrants (Low) ~High Barriers to Entry Capital Intensive Strong Brand Following Economies of scale High R & D Costs Industry in consolidation phase

Supplier Power (Low) Raw Materials are abundantly available Cheap resources, commodity items

Internal Rivalry (High) Fierce Competition- Adidas, Reebok, New Balance Mature Industry Mostly Non-Price competition Differentiation strategy Industry in Consolidation phase

Buyer Power (High) Everything depends on Customer Preferences Price sensitivity issues Brand following Retail and vendor consolidations Growing power of retail chains e.g. Walmart

Substitutes (Low) Other types of shoes Other sport apparel

Rivalry: (Very High)

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 Since the athletic footwear industry in the US is a mature industry, competition is targeted towards attaining market share. Companies need to introduce products at numerous price levels in order to compete and reach all areas of the market.  In this sense there are only a few players who are able to compete in all sectors: Nike, Adidas-Reebok, and New Balance. Smaller firms in this industry focus on specific type of shoes hence targeting specialized sub-markets, i.e. Asics on running shoes.  Rivalry among the big players is fierce. Since they cannot compete on price they need to differentiate their product through constant innovation. Also, continuous efforts are needed towards strengthening their brands.  In order to stay competitive and have presence in all sectors, many mergers and acquisitions, i.e. Adidas and Reebok, are taking place and the market is going towards consolidation. As a result, maintaining a single brand image for companies like Nike becomes really a tough ask. We will discuss rivalry more in details in the Competitor Analysis later on. Threats of New Entrants: (Low) Barriers to entry in the athletic footwear industry are high due to several factors.  It is as very capital intensive industry. Even though it would not be difficult for a new company to obtain the raw materials and the labor needed to produce shoes, there is almost no chance for them to gain popularity in such a mature industry with some of the strongest brand names in the world. Brand loyalty is extremely strong and it would be very hard for a new entrant to “steal” loyal customers from the already existent players.  Economies of scale play a huge role as well and the bigger players have an advantage of producing the products at a lower price than compared with newer entrants. As the output is bigger and the fixed costs of factories, machinery, marketing and R&D will be decreased per unit. Both marketing and R&D constitute high costs and since new entrants will not be able to take advantage of the economies of scale they will be less competitive.

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 Another barrier is the fact that access to endorsement, which we discussed, is very important in the industry. The bigger players have already established agreements with both teams and athletes. New entrants will not be able to pay hefty sums for such agreements. Similar conditions apply for distribution opportunities and retailers. They want the wellestablished brands on their shelves that customers want rather than a new unknown brand.  The industry itself is in a consolidation phase and only the big ones will survive. The large companies are strategically and constantly acquiring smaller companies. Some of the most popular acquisitions include Reebok by Adidas, Converse by Nike, Saucony by Stride Rite, etc. Small companies are bought before they become a threat to the bigger ones and before they have a chance to gain market share. In other words, it is impossible to grow in this industry because someone will take over your company. Substitutes: (Low) In theory there are a several substitutes of athletic shoes. However, the perceived threat is low since they have unique functions.  First, in the sports industry, other types of apparel could also be seen as a substitute, in

terms of building image and style.  Second, in the same product category, other types of shoes are also substitutes, such as slippers, heels, boots, flip-flops, etc.  Even though sneakers are still the most popular type of footwear in the world,

there is substantial threat coming from the number of other types of shoes. Lifestyle athletic shoes sales, for instance are growing at the fastest annual rate and Puma is undoubtedly the leader in this segment- with more than 50% sales growth.18

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“Athletic Footwear; Industry Analysis,” Tufts University, Economics of Management and Strategy, May, 2006.

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 Companies such as Steve Madden and Sketchers are also seen as threats. Steve

Madden’s “thick high heeled shoes”19 are very popular and since thick heels are considered a more comfortable version among women they could be a substitute for sneakers. Sketchers introduced non-athletic heel-less shoes also called “sneaker mules”20 These shoes, first gained popularity in Europe but now are also becoming popular in the United States. Supplier Power: (Low) Typically athletic shoes are manufactured using three major raw materials- cotton, rubber, and foam. The rubber is vulcanized through a simple chemical process that improves durability and stability.21 However, all of these materials are commodity goods. In other words, the suppliers do not have the power to bargain the price of their product, since there are numerous suppliers. Hence the supplier power is low. However, there has been some standardization of production in the industry due to growing concerns of labor practices of the suppliers and manufacturers. These practices have been damaging the image of some companies including Nike. Therefore, the big companies prefer to work only with approved manufacturers and suppliers that are known to follow these labor standards. Both Adidas and Nike have created a system to ensure that all the high quality of the product, the working conditions, and the distribution are at high standards.

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If

the supplier fail to meet these standards contracts are discontinued. Therefore, suppliers are trying to establish themselves as reliable because once they gain Nike as a customer they know that they will request enormous volumes. However, to reach this level, the supplier needs to make investments in their facilities to improve working conditions and many suppliers cannot afford to do so.

19 20 21 22

Ibid. Ibid. Ibid. Ibid.

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Buyer Power: (Very High) The buyers for this industry are retailers and end users.  The footwear retailers, i.e. Footlocker, Wal-Mart, range in sizes. However, the top 25

retailers account for two-thirds of the sales of athletic footwear- approximately $15 billion in value.23 New retailers are entering the market, such as “big box stores” and vendors that open their own stores. The lack of concentration among buyers brings down the margins and gives the power to the vendors. Retailers also have no power in determining the design of the product. Therefore the big footwear manufacturers generally dictate the price of their shoes.  In order to gain more power buyer companies have started merging- Footlocker -Foot

Action, Sport Authority- Gart. This consolidation will transfer some of the power from the big players because in order to be industry leaders they will need these well-recognized retailers as well. Growing margins suggest that buyer power has been increasing.24  The end user of the industry is also considered a buyer and he has unlimited power.

Every company is fighting for the loyalty of the end user through constant innovations and brand management. However, if the user is dissatisfied, he can easily switch the brand to Threat of New entrants (High) another one. Therefore, overall we consider buyer power to be high. Less/Not explored Markets i.e. everyone will be interested Non Sophisticated market needs Local players advantage – Conservative government policies to help local players Supplier Power (Low) Rivalry (Very High) Cheap labor, needing Fierce Competition from jobs in South East global brands E.g Adidas, Asia Puma,Markets New Balance etc Porter’s five forces analysis: Emerging Raw Materials are Local players with cultural abundantly available advantage and price Cheap resources, competition commodity items 23 24

Buyer Power (Very High) Customer needs to be educated High price sensitivity Brand image to be re-established Need to educate and catch retailers, distributors etc

Ibid. Ibid.

Substitutes (Low) Bare foot, walking with slippers e.g. India Leather boots and slippers

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As we see in the five forces analysis picture above, most of the attributes pertaining to Supplier power and Substitutes remain the same. However, there are considerable changes in the nature of the market, the buyers and hence we see some changes in rivalry, new entrants and buyer power. Threat of New entrants: (High)  Since the markets are quite new and unexplored, every big player in the world is looking to enter into these markets.  The market is less sophisticated and customers will get satisfied with basic level products. Hence, less capital is needed to produce basic level goods.  Since there is no major brand following, it is not capital intensive for a new entrant to enter into a regional market.

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 Even though the global players can have low production cost, the marketing and other expenses grow high and they are competing with smaller players here unlike in developed countries. As a result, overall threat of a new entrant is considered high here. Buyer Power: (Very High) The buyer power remains high in both developed and emerging markets. However, the reasons for that differ as follows:  The customer is not aware of the product or brand. Hence, he needs to be educated about the features and the comfort the footwear provides.  Emerging markets in general are very price sensitive. The premium sector will grow with time as the market becomes more sophisticated.  The retailers and distributors need education to do the business and operations and hence, it is a daunting task for making them move from their regular local vendors to a new vendor. Threat of Rivalry: (High) The overall threat of rivalry is high here as well, arising from two dimensions:  Global competitors like Adidas, Reebok, Puma etc  Local competitors who are already in the business and have a cultural advantage in understanding the customer. In general, with three out of five forces being high, emerging market does not look like a favorable environment. However, on continuous marketing and educating efforts, this market might be transferred into a growth region for all companies.

Competitor Analysis To understand the position of Nike in the industry, it is important to perform a competitor analysis. Nike’s major competitors in the footwear industry are Adidas & Reebok, New Balance, Puma, Sketchers and other players combined together.

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Market Share: As of 2007, Nike has a dominant global market share of 31% followed by Adidas and Reebok together at 22%. The corresponding figure in US hovers around 36% followed by Adidas and New balance at distant second and third. 25

Source: Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008.

Financial analysis:26

Earnings Current Company Mkt Cap per share ratio 35.42B From theNike analysis shown above between3.51 the major competitors, it is quite obvious that 2.97 Puma 3.66B Nike is leading the market in most of aspects.13.63 However, the company to note here is Under 2.19 Armour as this company has high growth rate despite the fact that other companies are 1.58 Adidas 1.95 8.80B experiencing a slow sales growth. Nike should put some effort to study the strategy of this Under Armour 0.98 1.63B 3.73 company. Privat New Balance

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Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008. Yahoo! Finance, Google Finance, SEC Filings of the companies

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Shoe\Company

Running Walking Basketball Children’s Tennis Lifestyle Skating Cross-Training Soccer

X X X X X X X X X

X X X X X

X X X X X X X X X X X

X X X X X

K-Swiss Converse Puma Asics Vans Brooks AND1 Stride Rite Corp Spira Mizuno Saucony

Type of

Nike Adidas Reebok New Balance

Product Portfolio Analysis: 27

X X

X

X

X X X

X X

X X

X X X X

X X

X

X X

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Company websites. “Athletic Footwear; Industry Analysis,” Tufts University, Economics of Management and Strategy, May, 2006.

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It can be seen that Nike has products in all lines. During early 2006, Nike was lacking products in the skating category. However, they quickly recognized this shortcoming and introduced a skate boarding shoe. Also, it can be noted that there are overlapping product category lines between Adidas and Reebok. Hence, there is a high possibility that Adidas is competing with Reebok and hence cannibalizing its own sales after the merger. With such a product line, Nike will be able to compete with all players in the industry. Therefore, Nike is at a strategic advantage. Advertising strategy: The advertising strategy differs from company to company. Generally, Nike believes in spending 5-7% of its revenues in advertising and endorsement. Nike has planned to spend $4.2 Billion until 2014 for endorsements alone. With the huge size of Nike, it is tough for other companies to allocate a big amount for their marketing expenses. Moreover, Nike has always an edge when it comes to advertising and marketing. The table below shows the advertising strategy for the major players in the industry. Company

Nike

Adidas, Reebok

Puma28

Other companies Branding Strategy:

Strategy  Endorsing Athletes  Sponsoring Sports events  City based advertisements  Banners & Billboards  Themes on bringing inspiration and innovation to every athlete in world  Sponsoring Sports events  Endorsing Athletes  Themes on improving performance of every athlete in the world  Mixing influence of sports, lifestyle & fashion  Puma concept retail stores  Puma fashion shows  New stuff advertising campaigns  Building seasonal momentum during holiday seasons  Minimal or less advertising based on stores

Nike has invested a lot so far in developing a premium brand that implies high quality and care for the customer. Nike has a wide range of products ranging from athletics to life 28

“Puma – Brand Communication analysis,” Trent Kahute, 2006

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style and also in different price ranges. Therefore, it is always a challenge to fight against brand dilution within Nike. The following gives an idea of the customer’s perception of the brands. Company Nike

Branding message and strategy Athletic, Influential, Outgoing, Aggressive, hi tech, futuristic, retro cool American way of living Associated with Athletes at top of their sport To bring inspiration and innovation to every athlete in world

Clear, orderly, Practical, hi tech, Sophisticated, Sincere Adidas, Reebok Conservative European style To improve performance of every athlete in the world Associated with elite soccer players/teams, NBA stars, Hip hop artists Elegant, colorful, fresh, spontaneous, individual, metropolitan, international Puma Mixing influence of sports, lifestyle & fashion Fashion brand, performance & casual footwear, fringe, extreme sports Other companies Based on their product lines. Generally not a strong brand message In general, Nike’s shoes are associated to be of high quality and stylish. Reebok’s are comfortable and casual, and the Adidas brand boasts superior performance and is “perceived as a professional, technically orientated brand with strong European roots”29. Technology and Innovation strategy: Nike fields some of the best in class technological practices and has a few patents to its credit. Nike emphasizes on these and has developed a lot of new products with use of high technology and sophistication. An example of that is the microprocessor shoe to give great experience and comfort to the customer. However, Adidas is also working on high tech innovations to provide high quality shoes. Lately, Adidas and Nike have been doing entertainment based marketing campaign by forming alliances with technology/entertainment companies. Nike had an alliance with Apple to sell Nike shoes with Apple iPods while Adidas tied up with Microsoft to sell Adidas goods with Microsoft Xbox gaming systems. So far the success of these alliances is yet to be quantified. Manufacturing strategy:

29

Kang, Stephanie. “Sports Shoe Rivals Step Up”. The Wall Street Journal, 6 Jan 2006.

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Nike follows a 100% outsourcing strategy. Most competitors follow the outsourcing strategy. Exceptions to this are New Balance and other smaller players. New Balance claims that 75% of its production is from the US and other small companies produce in the US as well. Competitor Analysis in Emerging Markets: In general, competition in the emerging markets is granular and from a lot of players. However, the case in China is very different. According to a research report by BofA Merrill Lynch, Nike was the most popular sport brand in China with 19% market share in 2008, while Adidas ranked second with 15% share and Li Ning third with 11%. The brokerage estimated Li Ning to have overtaken Adidas in 2009 as the second-largest player in China's $10 billion sportswear industry. There are speculations that Li Ning has overtaken Nike as well. 30

Issues of concern It is not easy to stay as the market leader always because everybody wants to be in your place. Nike’s overall US revenue growth is declining as discussed earlier. Overall growth in other geographical regions has also dropped considerably. With the merger between Adidas and Reebok taking off slowly and strongly and surging of companies like New Balance, Nike’s sustainability of its market leadership becomes challenging. There are a few challenging issues that Nike is facing at this point of time. 1. Maturing industry in USA a. Tightening competition – growth of Adidas, New Balance, Puma etc. as shown

in the previous competitor analysis sections. Product differentiation alone will not help as customers will not be able to understand the advantages of technology beyond a certain level. There should be a price advantage as well. b. Problem of brand dilution – Nike has been developing a premium and high

quality brand image so far. With Nike entering low-price segments, there is a 30

“Chinese Sports Brand Takes on Nike,” Vivian Wai-yin Kwok, Forbes.com

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possible chance of brand dilution and as a result customer loyalty might take a hit. c. Sky rocketing marketing expenditures and risk of endorsements – Marketing

expenditures are growing steadily. A new risk on athlete endorsements is seen after the Tiger Woods scandal. Therefore, Nike has to decide on spending the endorsement and marketing budgets wisely. d. Premium brand’s susceptibility to economic recessions – Premium brands are

always susceptible to recession. It is to be noted that Nike has not gone back to its original growth rate ever since the 2008 economic recession occurred. 2. Increasing competition in developing economies Amidst heavy competition to be a market leader in developing economies, there are quite a few issues to be noted. a. Losing market share in China – Li Ning, as we explained in the previous

section is in catching distance. It is worth noting that Nike does not have a Chinese online website store to facilitate customers to come online and learn/buy Nike’s products31. b. Price sensitivity – Developing markets are generally price sensitive markets.

Nike’s premium and high quality brand image doesn’t sync with the expectations of the customer. In other words, the differentiation strategy might not bring as good results as it had brought in the USA. 3. Significant reliance on IT and sophistication in managing supply chains32

Nike is heavily dependent on information technology systems across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales, and distribution. Nike’s ability to effectively manage and maintain our 31 32

“Li Ning Hoping To Grow Market Share Through Online Sale,” Sports Business Daily, December 2009.

Nike, Inc. 10-K 2009, p. 18

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inventory and to ship products to customers on a timely basis depends significantly on the reliability of these supply chain systems. 4. Environmental sustainability a. No direct control on compliance issues – Nike relies solely on its

subcontractors for manufacturing of its footwear. Having already faced several issues on unfair labor practices at these subcontractor factories, Nike always carries a risk of not having control over compliance to labor code laws. This is considered by us as a big risk as another scandal of unfair labor practices will completely collapse Nike’s position in the industry. b. Solid waste from shoes – There will always be a lot of solid waste from Nike’s

footwear manufacturing processes. Also, being a market leader, it is the responsibility of Nike to develop environmentally sustainable business and stand as an example for others to follow. A possible option will be recycling, but Nike still has no concrete strategy in this place.

Recommendations  Focus on Technology and Innovation o

With the market being mature in US and developed countries, product differentiation is the best tool to gain market share. Nike should continuously invest in product design and innovation to be always with a leading edge over the trailing competitors.

o Focus on setting up a reliable Information system that is capable of handling complex supply chains in a fool proof manner. o Property, Plant & Equipment costs for 2009 stood at $1.957 B as opposed to $1.890 B in 2008 which is a 3.5% increase. However, this needs to increase by 5 – 7% every year. Overall, 15 – 20% of revenues need to be spent on this

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because the product design and innovation forms the backbone of the company.  Revisit branding strategy by decoupling cheap and low cost footwear from flagship items o

Cheap and low cost footwear should be decoupled from the existing Nike brand. They might be sold under a different name, but not Nike. This might help savor the premium brand image of Nike and help convey one message to our brand. For example, Nike starter shoes should be sold as just starter and not Nike starter.

 Follow both Differentiation and Pricing based strategy o

With the market matured in the US and developed countries, the competition comes down to getting more market share than any other competitor in the business. Thus, an aggressive strategy that combines both differentiation and pricing based strategies together will definitely serve better than just differentiation. We saw that the operating margins for Nike are around 44%. This means that Nike has the scope to do a combined differentiation and pricing strategy

o

In a developing market, the market grows with a price competition and later transforms into a high quality based market with non-price competition. Since the industry in the developing economies is growing, it is necessary to have an aggressive pricing based strategy as well. As Nike has been building a high quality brand image so far, it makes good sense to follow both differentiation and pricing based strategy together.

 Compete in full fledge in Emerging markets, particularly in china make a website store

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o

Nike is currently the market leader in China. But competition is catching up and Li Ning has been growing strongly. In this situation, Nike has to operate in full fledge to capture market share in emerging markets. Basic things like an online store in a country like china will seriously help drive a lot of business.

 Invest on sustainability research o

It is high time Nike begins to invest more on its sustainability research. Companies like CorpWatch are consistently watching Nike and this issue of environmental pollution will eventually come up.

o

Also, if a proper recycling chain is established between the end user and the company, the overall fixed costs will go down and hence profits might go up, along with environmental sustainability.

o

Nike should also work with its collaborators in all forms to have efficient sustainable supply chains. This overall might reduce the costs for Nike and benefit the whole society as well.

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References: 1. Nike, Inc. 10-K, 2009. 2. NIKE, Inc. Reports Fiscal 2009 Fourth Quarter and Full Year Results 3. Wikiinvest.com, Nike, Inc. 4. “Strategic Analysis of Nike, Inc.,” DePaul University, March 14, 2000. 5. Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008. 6. “Athletic Footwear; Industry Analysis,” Tufts University, Economics of Management and Strategy, May, 2006. 7. “History of Nike,” Sneakerhead.com 8. Nike Official Website – www.nike.com 9. Kapferer, “Brand Identity Prism” 10. “Expanding the Playing Field: Nike’s World Shoe Project Case,” The William Davidson Institute, January 2002. 11. Yahoo! Finance 12. Google Finance 13. “Puma – Brand Communication Analysis,” Trent Kahute, Fall 2006. 14. “Sports Shoe Rivals Step Up,” Stephanie Kang, The Wall Street Journal, 6 Jan 2006. 15. “Chinese Sports Brand Takes on Nike,” Vivian Wai-yin Kwok, Forbes.com 16. “Li Ning Hoping To Grow Market Share Through Online Sale,” Sports Business Daily, December 2009.

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