The Problem of Catch-Up in Developing Countries at the Level of the Nike In Relation To a Firm Level - Essay Example

Case Study-Nike (The problem of catch-up in developing countries) Globalisation of production and investment in recent years has led to a situation where long-term capital inflows from advanced economies to developing economies is taking place at a rapid pace. No doubt this has contributed immensely to the economic growth and development of these nations. In this process while on the one hand global knowledge is being used locally at the same time local societies too are moving towards a knowledge society with an increased level of locally produced knowledge. It is still widely believed about the developing world that most of the knowledge and the transition societies is produced outside the region. The later half of the 20th Century saw dramatic growth in industrial production and in the mass consumption in developing nations. Growth of industrial output in countries like China and India during this period was robust and to some extent the process of catching-up also began in the technological field (Linsu Kim, 1997). The process is thus called "imitation to innovation" approach. This took place for the most part in traditional industries such as textiles and clothing and the earlier product generations of the machine tool and consumer electronics industries. Globalization has become increasingly important in determining the rate of economic growth, with estimations that emerging markets will account for a larger piece of the world economy by 2020. Studies suggest that the shift of labor-intensive production processes from regions like Western Europe to lower-cost economies will continue. In fact it was during the 1980s that development theorists and practitioners began to re-conceptualize the catching up process, from one based primarily on the transfer of technology to one of learning to produce quality products efficiently (Nelson, 1998). Evidence for the success of such a strategy was found in the growth of manufactured exports, notably from the Asian tigers. The indigenous manufacturing capabilities of such low-cost economies too are on an upward journey. These countries had progressively climbed the ladder in traditional industries such like textiles and clothing. This trend kept going even in consumer electronics, from low-cost assemblers of finished products to producers of higher value-added products, original equipment manufacture (OEM) and, in couple of cases, own brand manufacturers who had mastered the process from product conceptualization to the market (Kwong & Ng, 2001). The competition is really very stiff in case of unbranded or lesser known brands. But in case of reputed brands like Pepsi, Coke, Nike, Puma, Reebok etc. the developing countries find it difficult to ‘catch-up’ with their might. China, for example is a land that has inspired marketers and investors. Once known as a potential market for goods produced elsewhere, today the country is recognized as a capable global competitor in its own right. It has ambitious plans as well, not only for Asia but for developed economies as well. But, can it give a company like Nike the run for its money? Similarly, India is home to large and skilled human resources having inherent strengths, which have made it a major success as an outsourcing destination in the IT field. The world at large has accepted its strength in producing quality software at affordable prices. But is it possible in near future for an Indian company to command the respect like Intel as a brand has? In fact it is not just the country’s strength or weakness which hinders the prospects of ‘catching-up’, there are a host of factors which create barriers in ‘catching-up’. MNC’s gain strength from a host of factors like; Brand identity Heritage Bigger perspective Leaner organisations Strong emphasis on Research and Development activities More concentration of employees all over the world More locations, as they have been doing business in a lot of countries around the world Wider range of products The power of money Years of experience with competition Loyal Customer base Value associated with the brand Patronage in many countries Long-distance and years of linkages to suppliers, clients, distributors Broader understanding of customer preferences. With particular emphasis towards countries like China, India and Indonesia, three big markets in the Asian subcontinent let us analyze some of the barriers that appear on the scene to catch-up with a company like Nike; i. Nike is a global brand. By developing a successful own-brand, the company generates a key business asset. In a highly competitive and overcrowded market, the brand helps in differentiation and protection. Nike too has a good competition with the likes of Reebok, and Addidas. But its business philosophy underlined by its mission statement, “To bring inspiration and innovation to every athlete in the world” has so far helped it immensely in gaining loyal customers all over the world. The statement clarifies that ‘if you have a body you are an athlete’. Nike can easily afford to keep investing in maintaining the brand identity developed over the years. An established brand results in Willingness on the part of the customer to pay even more as the brand is perceived as having quality, leadership, functional benefits and self-expression. This helps in creating brand equity for Nike which is brought forward from the relevant knowledge of the brand with a set of favorable associations in a given purchase decision context. ii. Nike is a very competitive organization. Phil Knight (company’s founder and CEO) is often quoted as saying1 that Business is war without bullets. Over the years, the company has developed a healthy dislike of its competitors. In fact Nike doesn’t believe in having its own factories all over the world, instead it makes fullest use of the manufacturing facilities in the country of its targeted business. This way it doesn’t have to make huge investments in factories, buildings and manufacturing workers. But the company prefers to keep overall control on the aspects like features, quality etc. with the help of a core team of its experts. iii. The leaner organisation has strong research and development centres spread around the world at many locations. This helps the company in coming out with innovative product range suitable to marketing needs at different locations. Then they lookout for setting up manufacturing base where the company can produce high quality product at the lowest possible price. Nike appoints its own key personnel. iv. This way Nike has developed the ability to globalize the local knowledge. Advances in information and technology are primarily responsible for the explosive rate of knowledge production. Developing economies like India have a huge pool of talent. Besides being technically sound, the work force is quite proficient in English and is ready to work at lower wages in comparison to other developed countries of the world. What they need is good money for the work, which a company like Nike can easily afford. v. Nike keeps evaluating the pros and cons of remaining invested in a market and location, and the company is very professional in its approach. Whenever it finds that the cost of production is not matching up with the generation of revenues, it starts looking for alternative sites. The Asian subcontinent is on an economic upswing. The tremors of financial crisis in Indonesia too are subsiding, with GDP figures2 of $281.3 for the year 2005. China and India too command GDP figures of $2225 and $800 respectively, which indicates that these countries will continue to be economically reliable for Nike. vi. Nike started off with the athletic footwear range with products designed for men, women and children. Running, cross-training, basketball, soccer, tennis, golf, baseball, walking, hiking, outdoor activities, skateboarding, bicycling, volleyball, wrestling, cheerleading, aquatic activities, sport-inspired urban shoes, and children’s shoes. Gradually the company has diversified into sports apparel and accessories covering most of the above mentioned categories, sports inspired lifestyle apparel, athletic bags, accessory items, golf clubs and balls, sport balls, eyewear, timepieces, electronic devices, bats, gloves, protective equipment, and other equipment designed for sports activities. It also sells casual footwear, apparel and accessories for men and women under the brand names Cole Haan. There are in fact many more such products and ranges. All this diversification helps in reaching different segments of market and to different types of customers in all nooks and corners of the markets where it has a stake. Such a vast presence creates further roadblocks for local manufactures to come up to the matching standards. vii. It takes good amount of money and resources to set up and stay a business. The global nature of economy has made the power of balance sheet much more crucial. Latest figures of Nike (Aug 31, 2006) indicate that revenue of for the quarter were placed at $4,194.1 million, a 9% rise over the previous quarter. Sales reached $15 billion for the fiscal year 2006, with Earnings per share are up 18%. That means Nike is an advantageous position to use its finances to take on the competition. viii. Nike has developed a reputation over the years owing to the brand identity, differentiation, marketing strategy and positioning. In fact even those who have never purchased anything from Nike also form an opinion about the company. The company accepts the challenge of sustaining this tempo and keeps gaining more loyal customers by identifying the brand with the people, market and local sentiments. This requires regular investments which is not easily possible for any company from the developing economies. Today the customer tends to attach more value to a product which keeps itself in the limelight throughout the year. For this very reason we keep seeing the advertisement campaigns of cold-drinks like Coke and Pepsi even during the extreme cold weather. The simple reason is they need to remain fresh in the memories of the consumers. Years of experience has made the company wise enough to remain in news and even take fullest advantage of some adverse reactions from the locals in some countries. For example3, Nike introduced its "Air" line of basketball shoes in 1996 with a stylized, flame-like logo of the word Air on the shoes backside and sole. But it was interpreted as ‘Allah’ by some people in the Muslim world. Then began a controversy, which continued for more than a year. After initial verbal duals Nike discussed the issue with elders at ‘Council on American-Islamic Relations’ (CAIR) and not only decided to do away with the model but also assured that in future the company would talk to the Muslim clerics in designing future models. The company also donated $50,000 for a playground at an Islamic school. Can any other company in the developing world afford this type of luxury? ix. Brand Zealots for Nike: Today’s customer is very choosy and a loyal customer for Nike might be someone who buys Nike shoes frequently no matter the channel and tells friends to buy them. Once Nike makes the distinction, it can afford to focus its loyalty efforts on those loyal customers who are also defined as valuable customers. Nike also believes in encouraging customer strategies that encourage incremental spending and new spending on other product lines, as well as recommendations. Such initiatives are called loyalty initiatives. It is also a strategy that works best in a corporate culture with a customer-centric mindset. Big companies centered on customer loyalty encourage customer feedback and take due care of that feedback as they have a preset mechanism to evaluate such feedbacks. Moreover well established brands have fanatical followers. Be it with Coca-Cola, Nike or Harley-Davidson, there are many loyal consumers whose relationship with the brand goes well beyond the fulfillment of a functional requirement. They are militant in their commitment to their preferred brand. They create positive word of mouth publicity for the brand, experience the product to its fullest. Such consumers, if defrauded, do not hesitate in launching frontal attacks on the company as well. Big brands have brand managers who act as chaperones of these relationships. They main aim is to strike a difficult balance between commitment to the core of the franchise and the desire to reach out to new segments. A recent survey4 points out that high-quality relationships with customers will be cited as one of the top sources of competitive advantage in 2020, with 59 percent of EIU survey respondents saying that these relationships would become more important. x. One of the benefits of having a well-known and respected brand name is that firms can command higher profit margins by charging higher prices for the same products. This results in a higher price-sales ratios and firm value. The larger the price premium that a firm can charge, the greater happens to be the value of its brand. Though the profits margins for a company is stated in terms of net income or in terms of operating income (EBIT) and there happens to be no mention of brand value, but in recent past intense debate is going on to include brand value as well in these calculations. References: 1. Kim, L. (1997) Imitation to Innovation: The Dynamics of Koreas Technological Learning (Boston, Harvard Business School Press). 2. LYNN K. MYTELKA, ‘Catching up in New Wave Technologies’, Oxford Development Studies, Vol. 32, No. 3, September 2004. 3. Christopher M. Moore, From rags to riches – creating and benefiting from the fashion own-brand, International Journal of Retail & Distribution Management Volume 23 • Number 9, MCB University Press 4. Nelson, R. (1998) The agenda for growth theory: a different point of view, Cambridge Journal of Economics, 22, pp. 497-520. 5. Wong, P.-K. & Ng, C.-Y. (Eds) (2001) Industrial Policy, Innovation and Economic Growth (Singapore, University of Singapore Press). 6. Daniel Pipes, (September 12, 2006)‘Nike and 9/11’ New York Sun, available online at http://www.danielpipes.org/article/3960. 7. John Gaffney, (Feb 2006), ‘The Myth of Customer Loyalty’, available online at http://www.instorecard.com/news_item.asp?articleID=438 8. William J. McEwen, (Feb 2005), ‘Chinas Global Opportunities - and Domestic Challenges’, Gallup Management Journal, The Gallup Organization, Princeton, NJ. 9. Caroline Bain, (June 2006), ‘Country Report (Indonesia)’, The Economist Intelligence Unit Limited 2006. 10. Zakaria, Fareed, (2002), ‘Look East for The Answer’, Newsweek 11/4/2002, Vol. 140, Issue 19 Read More