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Nike: Why Is It a Success, Research Paper Example

Pages: 11

Words: 3139

Research Paper

History and Introduction

Beaverton, Oregon based Nike Inc. is the world’s largest athletic footwear, apparel, and equipment manufacturer. The company was founded by Philip H. Knight, a then University of Oregon’s track athlete and his coach Bill Bowerman in 1964 as Blue Ribbon Sports and officially incorporated as Nike, Inc. in 1978. The inspiration for the name “Nike” came from Greek Goddess of Victory of the same name. Nike employs about 32,500 workers and trades on the NYSE under the ticker (NKE). Nike is one of the only two Fortune 500 companies from the state of Oregon.

In addition to its mainstream product lines that are marketed under the Nike brand such as Nike Golf, Nike Pro, Nike+, Air Jordan, Nike Soccer, Nike Running and so on, the company also owns several prominent subsidiaries such as Cole Haan, Hurley International, Converse, and Umbro. The company operates stores under the name NikeTown. Along with Coca Cola, IBM, Microsoft and the likes Nike is one of the world’s most valuable corporate brands by both name recognition and commercial value. Forbes puts the value of Nike brand at $10.7 billion, making it the world’s most valuable sports brand, ahead of Disney’s ESPN Network. Of the $18.4 billion revenues for the fiscal year 2009, 90% was contributed by merchandise emblazoned with either Nike or Nike Golf logos (Schwartz, 3 February, 2010).

Production, Distribution, and Marketing

Nike’s operations are vertically integrated which means the company controls every segment of the value chain from the production to the sales. The company operates two manufacturing facilities, one for footwear and the other for apparel and also procures its merchandise from third party suppliers. The company’s branded footwear is manufactured in four countries of which 36% comes from China, 33% from Vietnam, 21% from Indonesia, and 9% from Thailand. Similarly, Nike’s apparel supplies network comes from independent contract manufacturers in 34 countries such as China, Thailand, Israel, India, Malaysia, Mexico, and Turkey etc. (Datamonitor, July 2009, Pg. 5).

The company’s footwear distribution centers are located in Wilsonville, Oregon and Memphis and its apparel and equipment distribution centers are located in Memphis, Tennessee,  Tigard, Oregon, and Foothill ranch, California. Nike also operates 11 international distribution centers in Europe, Asia, Australia, Africa, and Canada . Nike sells its products through 296 retails stores in the US and over 25000 retails accounts in international markets in addition to independent distributors and licensees (Datamonitor, July 2009, Pg. 5-6).

The vertical integration of Nike’s production and distribution systems not only allows the company to maintain control over the entire process and manage its corporate image but it also leads to signicant cost savings through careful planning and smooth integration of different operational aspects, very much like the way Apple does in the consumer electronics industry. The company has been often hailed as leading the innovations in global manufacturing and distribution business practices. It was one of the first US manufacturers to venture into production outsourcing and also one of the first companies to adopt mass-customization to cater to a growing customer base that is enjoying rising income levels and wants greater choices such as customization options. Even though the company went through a long legal battle that threatened to destroy much of the brand’s goodwill developed over the years  and came to be known as Nike v. Kasky case, the company wasted no time in revamping company policies that dictate its commercial relationships with outside suppliers and put new labor codes in place that all the outsiders suppliers had to agree to abide by to win and maintain Nike’s accounts.

The company not only employs one of the most advanced and effectively managed global production and supply chain but also harbors ambitions to become the most recognizable brand as its co-founder and Chairman Philip  H. Knight has often said. The company’s swoosh logo and motto “Just Do It” is visible in almost every major sports category. The company goes after the most popular sports in each of its markets and then after the most popular players and sports teams in each of those sports categories. Its not difficult to understand the aggressive measures that Nike is famous for. No other sports brand has more expensive and extensive sports contracts that Nike owns. Nike’s extensive list of past and current sponsorships include Michael Jordan, Kobe Bryant, and Lebron James in basketball, Andre Agassi, Rafael Nadal, Pete Sampras, Maria Sharapova, and Roger Federer in Tennis, Tiger Woods in Golf, Brazil, Portugal, and US national teams as well as Manchester United, Arsenal, Barcelona F. C, and Inter Milan in soccer, Derek Jeter and Jorge Posada in MBL, Ben Roethlisberger in NFL and so on. In addition, Nike is also the largest sponsor of college level sports teams in US.

Nike’s marketing portfolio of sponsorships, which is probably the largest in the world should not come as a surprise when we look at the local and international market sizes that Nike targets. The global footwear market grew by 2.6 % in 2009 to reach a value of $196.3 billion. The global footwear which also includes apparel is expected to reach a value of $230.8 billion by 2014, an increase of 17.6% ovr 2009 level. America alone accounts for 43.6% of the global footwear market though China’s share has been increasing due to rising income levels. Europe accounts for 39.3% of the global footwear market. Asia-Pacific account for the rest 17.1% though its share will grow faster than others in the coming years (Datamonitor, June 2010, Pg. 11).

Similarly, the global sports equipment market grew by 1.9% in 2009 to reach a value of $74.8 billion. The global sports equipment market is expected to grow by 10.6% over 2009 level to reach a value of $82.7 billion in 2014. Once again, Americas accounts for the major share of the global sports equipment market at 40% whereas Asia-Pacific accounts for 31.9%, and Europe accounts for 28.2% (Datamonitor, May 2010, Pg. 11).

Leadership Style, Organization Structure and Workforce Management

Nike was lead for a long time by its charismatic Co-founder and Chairman Philip H. Knight before he stepped down in 2004. Looking at Mr. Knight’s tenure as Nike’s CEO, we find him to be a transformational leader and a great visionary who understood the importance of sports marketing better than any other individual on the planet. Mr. Knight outsourced most of the manufacturing when Asian manufacturers with the exception of Japan had a reputation of producing low quality products. Mr. Knight knew that by keeping a strict oversight of the suppliers manufacturing processes, Nike could still control the production process without actually producing most of the products itself.

Nike’s corporate culture and inner workings make it very hard if not impossible for the outsiders to blend in. Nike’s second CEO, William D. Perez, a veteran of Johnson & Johnson learnt it the hard way. Even though Johnson was Phil Knight’s surprise choice over current CEO Parker because he thought an outsider would instill fresh ideas, the experiment failed. Some senior members of Nike Management not got over their disappointment of ignoring Mark Parker for the top slot and refused to accept Perez’ leadership. Eventually, Mr. Knight realized his mistake and let Mr. Perez go. In order to succeed at Nike, one has to be deeply ingrained in Nike’s culture and way of doing things and the best way to do is to spend years at Nike before moving up the management ladder as most of current Nike executives have. Some of the issues where Messrs Knight and Perez differed from each other were sales distribution channels (Mr. Knight preferred keeping current format while Mr. Perez wanted to move more sales over the internet) and Mr. Perez’ opinion that Nike was too resistant to outside ideas while Mr. Knight thought Mr. Perez didn’t understand Nike’s creative culture.

Nike’s current CEO Mark G. Parker who started his career with Nike as a shoe designer,  was responsible for the revolutionary visible ‘Air’ technology that gave the brand new life and helped it gain edge over Reebok. Excellence in footwear and apparel technology is one of the core components of Nike’s corporate culture. Nike encourages creativity in its workforce. Parker has reorganized the company into units based on particular sports so that each unit can focus onto its core competence and market territory without any corporate interference.

Nike hires most of its employees through internship programs that give interns the opportunity to get a fair idea of what worklife at Nike is about. Nike also runs intensive management training program in which interns are engaged in various challenging assignments over a period of 24 months. Nike’s Oregon campus lives upto its sports heritage and includes tennis courts, indoor and outdoor tracks, soccer fields, running trails, twp sports centers, and an 11 lane pool among other facilities.

Nike is known for instilling such a dedication in its employees that many of the employees even go for swoosh tattoo. Nike often rotates its employees through different assignments to enhance their teamwork skills and skills set. Nelson Farris, Nike’s director of corporate education, has been at the company for 33 years and designed most of the policies that inspire such devotion. New employees are told to find their interests and let the management know. The message is preached to new hires every 90 days, at a two-day pep rally that outlines Nike’s growth and pumps people up to imagine their own role at the company. Nike’s management and leadership is known to be quite approachable by new hires.

How does Nike manage to stay competitive while growing bigger and bigger at the same time? In addition to managing one of the most efficient manufacturing and distribution network on the planet, the company is also known to cultivate intense dedication in its employees from the day they join through motivation drills. The company has one of the most welcoming and non-discriminatory working environment in the US. The awards the company has won over the years for one of the best companies to work for in various categories lend credibility to Nike’s reputation but the greater benefits come in the form of happy employees that are also happy customers of the very company that employs them.

To understand the company’s commitment to a diversified workforce, we need to look at some of the critical employee statistics. In 2006 when Nike was first named to the Fortune 100 Best Companies to Work For , almost half of the company’s employees were females and roughly 40% were minorities (Fortune, 2006). This statistics include company’s both US and international workforce. Nike had 90 full-time employees in 2006 that were responsible for monitoring overseas factory conditions. Some of the perks in the U.S. include a 50% discount on Nike gear and a campus with a pool, climbing walls, and trails which doesn’t hurt being both a happy employee and a happy customer. The company was included in the Fortune 100 Best Companies to Work For again in 2007 and 2008.

Businessweek placed Nike #55 in its 2007 list 100 Places to Launch a Career and the students actually ranked the company at #14. The company’s commuter benefits landed it for three consecutive years (2004-2006) in Best Workplaces for Commuters list. Human Rights Campaign (HRC) has named Nike for the ninth time in a row, one of the best American companies to work for gay, lesbian, bisexual and transgender workers for the year 2011. Nike scored the highest possible 100 points. Nike was also awarded the “National Congress of American Indians Leadership Award” in 2002 (Nike, Inc., 2010).

Nike has been aware of the wastage that its production processes have created historically and has set ambitious targets for itself. Nike has developed “The Considered Index” that helps determine the environmental impact of every item that Nike makes. In 1998, Nike was exposed for operating sweatshops that paid extremely low wages. Since then Nike has worked hard to evaluate its ethical responsibilities. An internal study carried out in 2006 showed that Nike was spending $800 million a year on materials that were not part of finished goods. For Nike, the new way of saving is not lower wages but less materials and greater production efficiency. Nike keeps looking for ways to use less and less materials of which the prime example is Nike’s award winning Pegasus shoe.

Critical Success Factors and Threat

Nike not only enjoys strong goodwill but also manages cyclical variations in global economic environment by managing a diversified portfolio of products. The company strengthens customer loyalty by sponsoring some of the most beloved sportsmen and teams on a global scale. Sports fans are one of the most loyal customer base and also one of the most durable over time, often staying loyal to their teams their whole lifetimes. In addition, Nike’s local approach to each market enables it to better understand local tastes and consumer needs. It’s a well known fact that China represents the most profit opportunities in the field of sports for different types of businesses whether they are media, goods manufacturer or sports leagues. The country passionately follows global sports such as soccer and basketball and has been working to develop national leagues on the pattern of NBA and European Soccer Leagues etc. Nike actively scouts the global sports markets to identify the emerging talent and secure their potential future association. Nike already had a sponsorship deal with Chinese hurdler Liu Xiang before he became the first Chinese Olympic Gold Medalist in a short-distance speed event, while setting a new Olympic record in the 110-m hurdles race (Forney, Fonda, & Gough, 11 November, 2004, Pg. 54).

Nike understands Chinese nationalism and clever marketing tactics like this have helped Nike become the China’s latest iconic sports brand. Nike also sponsors Yao Ming, China’s most popular basketball export as well as favorite national player.  Nike sponsored Yao Ming before he became an international phenomenon and the company has also cleaned its sweatshop image in China. Nike has reduced its number of Chinese suppliers and almost all Nike’s Chinese suppliers supply products to Nike only, allowing the company to monitor working conditions more easily.

Nike is one of the world’s largest marketer and its advertising campaigms have won numerous awards. The company continues to maintain its working relationship with Weiden+Kennedy, the advertising agency responsible for creating the slogan “Just Do It!”. Nike favors stable and long period working relationships at all levels of its value chain which not only promotes loyalty from its working partners but allow the company to deliver consistent quality products and brand image to the world.

Financials

Key Financials (Source: Company Filings)    
Values in ($ Millions) 2005 2006 2007 2008 2009
   
Revenues  $      13,739.7  $      14,954.9  $      16,325.9  $      18,627.0  $       19,176.1
Net Income (Loss)  $         1,211.6  $         1,392.0  $         1,491.5  $         1,883.4  $         1,486.7
Total Assets  $         8,793.6  $         9,869.6  $      10,688.3  $      12,442.7  $         9,103.0
Total Liabilities  $         3,149.4  $         3,584.4  $         3,662.9  $         4,617.1  $         4,147.0
Employees              26,000              28,000              30,200              30,200               32,500
Key Financial Ratios (Source Company Filings)    
  2005 2006 2007 2008 2009
Profit Margin 8.8% 9.3% 9.1% 10.1% 7.8%
Revenue Growth 12.1% 8.8% 9.2% 14.1% 2.9%
Asset Growth 11.4% 12.2% 8.3% 16.4% -26.8%
Liabilities Growth 1.3% 13.8% 2.2% 26.1% -10.2%
Debt/Asset Ratio 35.8% 36.3% 34.3% 37.1% 45.6%
Return on Assets (ROA) 14.5% 14.9% 14.5% 16.3% 13.8%
Revenue per Employee  $        528,450  $        534,104  $        540,593  $        616,788  $        590,034
Profit Per Employee  $          46,000  $          49,714  $          49,387  $          62,364  $          45,745

Company’s financials show a very favorable picture of the company. Not only company’s revenues have been steadily increasing over the last five years but it has also continued to remain profitable despite the recent financial crisis. The company’s diversified product line and its global scale of operations act as a strong insurance against the variations in economic cycles. The company’s proft margins have stayed over 7% which is an exceptional achievement given the low profit margins that are common with commodity products and at companies with operation scale as huge as Nike. 2009 seems to have been a challenging year for Nike and the least impressive of the last five years but the consistency of performance in the first 4 years may indicate that 2009 has been an outlier and the company will most probably rebound with the strengthering of global economic picture as economies gradually undo the damage of financial crisis.

The greatest threat to Nike comes from counterfeit products that not only result in loss revenues but may also damage the brand image especially since counterfeit products have become more sophisticated that they are often hard to distinguish from a real product. The company also risks spreading itself too thin. Take any major global sport and Nike is likely involved in it. Nike faces an unprecedented amount of challenges as more and more competitors are entering the sports equipment industry often with an aim of specializing on one particular sport.

Conclusions

Nike comes across as very efficient and cleverly managed company that has not only revolutionized manufacturing and distribution systems but also gave a whole new name to Marketing Management. The company continues to be profitable and earn impressive margins even after been in business for over three decades and shows no signs of slowing down. The company has found the secret formula of exploiting every international market profitably while maintaining consistent brand image. The company enjoys a content work force and has improved the labor practices at its contractors’ manufacturing facilities by taking more active role in the aftermath of landmark Nike v. Kasky case.

Nike also makes serious efforts to employ a diverse workforce and provide them an accomodating work environment. This helps to reducce labor turnover and thus, hiring costs. Moreover, Nike grants considerable autonomy to its departments that focus on different sports categories and Nike has been quite successful in keeping its innovative culture alive given its behemoth size. The company offers the job security of an established organization with stable finances with the entrepreneurial environment of small company where innovation is encouraged and ideas flow freely. No wonder why Nike has continued to lead the industry in inventing business practices and maintaining market leadership while teaching it some valuable lessons along the way.

References

Datamonitor. (June 2010). Footwear Industry Profile: Global. pp. 1-34. Print.

Datamonitor. (July 2009). NIKE, Inc. pp. 1-9. Print.

Datamonitor. (May 2010). Sports Equipment Industry Profile: Global. pp. 1-31.Print.

Forney, M., Fonda, D., & Gough, N. (11 November 2004). How Nike FIgured Out China. Time  International (South Pacific Edition) , pp. 54-58. Print.

Fortune. (n.d.). Fortune 100 Best Companies to Work For (2006). Retrieved November 29, 2010, from http://money.cnn.com/magazines/fortune/bestcompanies/snapshots/945.html. Web.

Nike, Inc. (n.d.). Awards & Recognition. Retrieved November 29, 2010, from Nikebiz: http://www.nikebiz.com/company_overview/awards_recognition.html. Web

Schwartz, P. J. (3 February 2010). The World’s Top Sports Brands. Retrieved November 29, 2010, from Forbes.com: http://www.forbes.com/2010/02/03/most-powerful-sports-names-tiger-woods-nike-cmo-network-sports-brands.html. Web.

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