Nike and International Labor Practices - Case Study Example

NIKE SUMMARY The Nike Corporation is a world leader in the sales of athletic footwear, apparel, and equipment. They have grown from a small tennis shoe company to a company whose sales topped $13 billion dollars in 2006. Beginning with an idea that founder Phil Knight had in college, it has become the model for the outsourced marketing firm. It has diversified from shoes into apparel and sports equipment. In the high-end shoe market they are the most dominant brand. They further innovated through their ability to brand and market the shoes as a status symbol. Nike created the concept of the $100 pair of tennis shoes. Nike experienced some problems in the 1990s with respect to their labor policies primarily in Indonesia and China. Unions and NGOs accused them of paying wages that were insufficient for subsistence and using child labor. Activists continued to press Nike for action to resolve the labor disputes, but Nike refused to take responsibility. An onslaught of bad publicity resulted in falling sales, plummeting income, and reduced stock value. In 1998, after Nike revenue fell, they began to accept the responsibility for the contractors in their outsourced business model. The financial cost to Nike has been estimated at $400 million for failing to address the issue promptly. Nike is secure in its market sector for the near term. There are only a few companies that can match Nike's ability to advertise and market their product. They have the largest market share and even a merger between number 2 and 3 could not exceed them. Adidas-Reebok and New Balance combined still come in behind Nike. New entrants are not likely to take on these formidable competitors. The large market share that Nike enjoys is also a challenge for them. They can not grow through increased market share. For the near future, they are forced to enter new international markets to sustain the levels of growth they have seen in the last 3 years. Markets in China and India are their primary targets and they have made some progress there. India has contributed substantially to their revenue and they have gained the sponsorship of the Beijing Olympics. Nike has considerable brand recognition and customer loyalty. They have made use of leading sports figures to market their products with great success. Their well-known logo, the 'Swoosh', is easily one of the most recognized symbols in marketing. In concert with their strong financial position Nike is well positioned. However, they must continue to be vigilant to avert the public relations disaster of the past. Nike should be a world leader in the movement in international worker's rights movements. Their recent recovery indicates they have the confidence and the support of the market when they take action to correct the faults of the past. However, they will be subject to public scrutiny. They need to be pro-active at correcting and improving their image with the public through community charity programs. With their market position, their history of innovative marketing, and their ability to set trends they should be well positioned to overcome any damage that their reputation has suffered. CASE ANALYSIS Throughout the 1990s, Nike was repeatedly accused of violating fair labor practices through their affiliation with international contractors. Nike consistently denied any wrongdoing and contended that any violations were the fault of the contractor and not Nike. Several groups formed alliances to come to the aid of the workers primarily in Indonesia and China. These groups came from international rights groups, competitors, US activists, students, and possibly even the Indonesian government. International watchdogs accused Nike of failing to pay an adequate wage. They allied with religious groups on ethical grounds. As early as 1991 the Asian American Free Labor Association (AAFLI) and the Institut Technology Bandug (ITB) had published reports critical of corporate practices in Indonesia (Spar 153-154). They had an international responsibility to bring these issues to light and attempt to correct them. Union organizers also prodded them in an attempt to increase membership. This was done to correct injustices in the international labor market as well as to satisfy their supporters and contributors. Students and US activists took notice of the issue and pursued Nike's policies on the basis of fairness. By the mid 1990s the issue was being discussed in business classrooms and leading magazines. In 1997 Dartmouth University published an extensive report titled Survey of Vietnamese and Indonesian Domestic Expenditure Levels (Spar 160). These criticisms were partly for academic exercise but grew into a genuine interest in human rights. This generated massive student and public outcry for changes in Nike's labor practices. Two unlikely stakeholders that may have been behind the criticisms of Nike were the Indonesian government and the stockholders in Nike Corporation. Spar speculated that the Indonesian government may have initiated many of the strikes in an effort to "...convince an increasingly suspicious international community of the country's commitment to free speech and labor rights" (153). Shareholders in Nike, who stood to lose financially, may have wanted the situation rectified to minimize a future public relations disaster. The actions by these two groups would have by necessity taken place in the background without public credit for their actions. In 1992 Indonesia increased the minimum wage scale from 2100 rupiah to 2500 rupiah per day which still only provided 70% of a worker's minimal required need (Spar 155). Nike held fast to their position and refused to raise wages beyond the minimum. The charts below show the long term economic impact of that strategy. Figure 1 is a breakdown of the cost of producing a Nike product. Figure 2 shows Nike's net income from the period of 1992 - 1999. It also shows an estimation of Nike's income had they instituted a pay raise equal to 100% of the minimal required need. Figure 1 Cost of Product (From Spar p. 165) Figure 2 shows Nike's net income for the period 1992-1999. There is a steady increase from 1992 thru 1997. The red bars indicate the lower income that would have been generated by increasing wages. Through this period, it would have cost Nike approximately $600 million Figure 2 Income (From Spar p. 164)1 to raise wages. However, when the negative publicity impacted their sales in 1998-1999, the dramatic drop in income cost Nike an estimated $1 billion. The failure of Nike to deal with this issue in 1992 ultimately cost the company $400 million and market momentum going into the year 2000. Nike's business model was built on the concept of outsourcing. This allowed Nike to concentrate on design, fashion, and marketing. While this model was financially very successful, it failed to account for the public demand for responsible contracting. Nike originally had built in to its equation the factor of deniability. However, NGOs and the public did not accept the legal technicalities of this argument. Outsourcing had put Nike in a position of accepting sub-standard practices and in the public's eye they were complicit. The style of outsourcing that Nike uses was revolutionary and innovative. Many companies continue to follow this model in everything from manufacturing to customer service. Third parties fill the positions that have no logistical ties to the corporation except to provide the service. From this standpoint they are just another vendor. Public pressure has raised the issue of outsourcing to highlight the displaced jobs of US workers. The case of Nike was unusual in that it brought up the corporation's responsibility to the workers that were contracted. Porter's Five Forces analyzes the external environment that Nike operates in. It analyzes its competitors, customers, and potential for new entrants into the field to evaluate the impact these forces have on Nike's ability to sustain a competitive advantage. There is little threat of new entrants entering the market that Nike operates in. Footwear, which makes up 50% of Nike's revenues, is a highly competitive market that relies on brand recognition and customer loyalty. It would be difficult to ramp up an economy of scale to be able to match Nike and their few competitors that are well established in the market. Nike also has an international presence and could use pricing to discourage competition. Any new entrant would have to expect to spend enormous capital on marketing and advertising without any guaranteed results. Nike also has a complex system of manufacturing and distribution in place that would be difficult to compete against. Suppliers have little power over Nike. Their materials are readily available and market priced. The labor for making the products is contracted and mobile giving Nike the advantage of moving if suppliers exerted any pressure. Many manufacturers sell like or similar materials and there is little opportunity for suppliers to enter Nike's market. The material costs are a relatively small portion of the overall price of Nike's products. Buyer power is low for Nike. The products are consumer items and no one customer can effect Nike's sales with any impact. Nike benefits in this area by having strong brand recognition and loyalty. Nike sells high end products and customers are not price sensitive. There is little chance that customers will find a suitable substitute. Nike sells fashion footwear. The product may not be differentiated beyond fashion, but customers are attracted to the name and the fad concept of expensive athletic shoes. This status symbol quality of Nike makes it difficult for fashion conscious consumers to find an alternative product. As merely a product, there is no substitute for athletic footwear and athletic gear. There is a high degree of rivalry in Nike's market. There are few competitors in the high-end athletic shoe market and they control the dominating market share. In the athletic equipment market, the same is true. The products have a short lifespan and need to be continually reinvented by marketing to maintain sustainable revenues. There is a continual struggle for market share among Nike's few competitors. A change in strategy by any one of them would demand a response by Nike. The SWOT analysis evaluates the internal environment of Nike. It analyzes its strengths and weaknesses. It also evaluates its opportunities and threats in an effort to determine if current strategy is sufficient to maintain growth. Nike's greatest strength is its brand recognition and customer loyalty. This is complimented by its strong financial position and record revenues. Nike's market share is approximately 36% of the athletic footwear market (Kiley). This is supported by their diversity into apparel and sporting equipment. They have a long history of marketing success and manufacturing innovation. They have been pioneers in supply chain management and their expertise in outsourcing is one of their greatest assets. Nike has recently been through a period of great turmoil. It has suffered a public image problem due to its international labor policies. This has allowed competitors to take business from college programs and retail outlets and made the public sensitive to Nike's practices. They have replaced many of the management team and the founder, Phil Knight, is no longer at the helm. They also are being impeded by their market saturation. They are in a position that makes it difficult to increase market share. Nike has the opportunity to present a cleaner public image without seeming to be a marketing ploy. The cost of programs and policies to insure fair labor practices would be viewed as positive by investors and customers. Nike could capitalize on their previous failures. They also have an opportunity in the international market. They have the organization and expertise to expand into the lucrative markets in China and India. The sponsorship of the Beijing Olympics is an example of this. Since they have hit a market share barrier elsewhere, this would give them a chance to continue to grow revenue streams. Nike comes under the threat of failing to continue to present a positive public image. Any small indiscretion could easily be exaggerated to place Nike in a bad public light. The new management members may not be adept at maintaining Nike's marketing edge over the competitors. If the competitors could introduce price as a major selling point, it could threaten Nike's share. The recent merger of Adidas-Reebok has made a formidable competitor. Other merger opportunities for footwear companies could also threaten Nike's dominance. Nike is currently in a very strong competitive position. It is generating record revenues and profits even while suffering from an image problem. There is little opportunity for new competitors to enter Nike's market and their biggest threats will come from existing products such as Adidas-Reebok and New Balance. However, Nike's position is cautiously secure at best. A fickle consumer market and the need to innovate in product and marketing could threaten their strong position. The new management still needs to be proactive at addressing the public concern over past labor practices. This will come at shareholder expense and these will be difficult parties to satisfy. Nike's only opportunity for continued growth will be through entering new international markets or diversifying into new product areas. This will be Nike's biggest challenge as what sells in the US and Europe may not be appropriate for India or China. It may require a rethinking of marketing strategy. The market for athletic equipment will continue to very competitive. Though there is a large market concentration, the few competitors are fiercely innovative. Fashion needs to be continually reinvented. When consumers replace the short life span product, Nike must rely on customer loyalty. Their few major competitors have the resources to maintain a sustained marketing and advertisement campaign. Nike will have to be proactive at averting negative public relations as well as generating positive product perceptions. The future of Nike will rest on their ability to export products into untapped markets. China and India are on the Nike horizon and they have already started making inroads. Nike's Chinese projects include sponsoring the 2008 Olympic Games in Beijing, several Chinese athletic federations, and major Chinese athletes. According to Woolsey, "It's a strategy which has worked in India, where Nike's sponsorship of the national cricket team coincided with a 40% boost in revenue last year". Nike's revenues have clearly rebounded in recent years and they are recording record profits once again. However, their image has been tarnished and is still fresh in the public's mind. The issue of outsourced labor is a sensitive public concern. There are 2 areas that Nike needs to address to assure the continued success and not fall into the public's scrutiny again. They need to be pro active in international labor rights, and continue to redress past grievances through public programs. Nike can not afford to fall under the scrutiny of activists or NGOs in regards to their labor practices. They must be the leader in offering off shore workers above prevailing wage levels. This can be used as a marketing aspect for their products and may gain them a perception of higher quality in the market. They must also keep Nike in a positive public light. This could be done by being more active in charity and benefit programs. This would have to be done with a low profile and build support from the bottom up. It would have to be more than a token effort that was highly advertised. Scholarships for impoverished youth, working with immigrants, and sports medicine in schools could help improve their image. Nike is a true American business revolution. CEO Phil Knight was able to visualize the model for American outsourcing. It was truly a story of success. With all the problems that Nike has endured, they are still an amazingly strong company. They are the market leaders and future growth can continue based on new international markets. Given their history, they will probably continue to set the trend and lead the fashion in athletic footwear and apparel. The lesson of the Nike experience is that early action to eliminate a negative public reaction will be less expensive than letting the problem linger. The long-term costs are disastrous and a public sensitized to human rights can be quick to financially punish a company who violates them. Works Cited Kiley, David. "Reebok and Adidas: A Good Fit." Business Week Online 4 Aug. 2005. 17 Mar. 2007 . Spar, Debora L. "Hitting the Wall: Nike and International Labor Practices." Harvard Business School (): 151-69. Woolsey, Matt. "Nike's Game Plan: Growth In China, India." Forbes 7 Feb. 2007. 17 Mar. 2007 . Read More