Is Globalization a Good Thing for All - Case Study Example

Introduction 2 History and growth of Nike 3 OLI Framework & the Eclectic Paradigm: 4 PESTLE framework and drivers of Globalization 6 8 Porters Diamond Model 8 Sports foot-ware market 9 Conclusion: 10 Reference 12 Bibliography 14 Introduction Globalization as a business phenomenon gathered momentum in 1980s and with the advent of Internet in the late 1990s, flow of information was happening on a real time basis thereby making globalization an irreversible phenomenon. Given the extremely dynamic and competitive nature of the world economy and markets, globalization has long ceased to be an option and has become a critical necessity for survival and growth of a company. It is not uncommon to find companies head quartered in the US or Europe, having design and R&D centers in US, IT back office in India and manufacturing facilities in China. However, globalization has faced backlash both from the developed and rich countries as well as poor and emerging economies. While developed economies have criticized globalization as the root cause for job losses and the present economic recession, globalization has also been viewed as the reason for mushrooming sweatshops in poorer countries. Nike, for example, has been criticized by various NGOs for sourcing its products from manufacturers who employ child laborers to bring down costs and increase profits. There are different modes of globalization and each mode of globalization has its own share of advantages and disadvantages. The three most commonly used modes of globalization are Exports, Licensing and Foreign Direct Investment, or FDI. While export is perhaps one mode that involves least amount of risk, FDI, or Foreign Direct Investment involves the highest amount of risk. Conversely, FDI, in the best possible case, offers the highest degree of advantages of globalization. The OLI model proposed by John H Dunning offers a theoretical model that helps decision makers and stake holders analyze and decide on the most appropriate mode of globalization. History and growth of Nike Initially known as Blue Ribbon Sports, Nike was founded by Philip Knight and Bill Bowerman on 5th January, 1964. In the last 40 years, Nike has witnessed explosive growth and achieved $19,196 million dollars in worldwide sales in 2009. Nike employs over 33,000 employees all over the world with over 7000 at its head quarters at Oregon. In addition, Nike offers indirect employment to over 800,000 workers through contract manufacturing all over the world. Over the last four decades, Nike has grown exponentially and has more than 800,000 people working with its suppliers. The company has over 1200 products in its product lines (Locke, Siteman, n.d.). One of the most important factors that helped Nike grow at such a fast rate is the fact that they adapted to globalization very early in their history of existence. Blue Ribbon Sports, the initial avatar of Nike sold imported shoes from Japanese manufacturers. Nike was one of the first sports apparel companies that outsourced manufacturing to then low cost manufacturing destinations like Japan, Taiwan and Korea. As the Japanese and Korean manufacturing costs increased, Nike then shifted its manufacturing base to new manufacturing outsourcing hotspots like Pakistan, China, Thailand, Indonesia, Vietnam and India. Throughout, Nike has been guided by one single motto – invest heavily in research and development, product development, marketing and sales while getting the manufacturing outsourced from the lowest cost locations. This focus has helped Nike acquire high degree of competence in sports apparel designing and related research and development, market intelligence distribution reach. Simultaneously, it has developed a highly reliable and agile manufacturing and supply chain that manufactures products for Nike and also has the ability to change its product lines based on market requirements (Nike-a, n.d.). OLI Framework & the Eclectic Paradigm: As mentioned in the previous part of the report, the OLI framework proposed by economist John Dunning helps decision makers identify the most appropriate model of global expansion. The OLI framework is an extension of the transaction cost theory that states that the manufacturing and other activities are conducted in the institution only when the internal costs are lower than the costs in the free market. The OLI framework takes into account three different parameters to evaluate a globalization strategy - Ownership advantages: Ownership advantages refer to the set of advantages that a business organization may enjoy by virtue of owning resources that result in a distinctive competitive advantage. Typically, ownership advantages include factors like brands, proprietary technology etc. In case of Nike, owning manufacturing assets in ASEAN countries would not have given it any specific advantage over its competitors. On the contrary, owning a manufacturing facility would have resulted in increased capital investment, and higher costs. Locational Advantages: Locational advantages refer to the entire set of factors specific to a given geographical location that result in increased competitiveness of the company. Examples of these factors are heavy raw materials like coal, iron ore or availability of specific immobile talent in a given location. For Nike, there are truly compelling locational advantages for having manufacturing facilities in low cost countries like China, Thailand and Pakistan. Most of the manufacturing activities of Nike are highly labor intensive. So, by outsourcing it’s manufacturing to countries like Japan, Taiwan and Korea in the late 70s and 80s, and then to China, Pakistan, Indonesia and Vietnam in late 1990s, Nike could cut down on costs drastically (Nike-b, n.d.). Internalization advantages: Internalization advantages refer to the set of advantages that a company enjoys by manufacturing or delivering services through joint ventures or similar methods like licensing. Just like locational advantages, there were strong and compelling internalization advantages for contract manufacturing in these countries. While manufacturing sports apparels and shoes is a low capital intensive and low technology activity, it is, however, highly labor intensive activity. So, by outsourcing manufacturing of its products to sub-contractors in Thailand and Pakistan, Nike was able to maintain strict quality standards at low costs. However, outsourcing manufacturing would not have resulted in possible technology piracy – thereby adding the advantages of contract manufacturing (Harrington, 2003). So it can be inferred from the above discussion, there is minimal incentive for any international foot-ware brand to own a manufacturing set up in rich economies like USA, and hence outsourcing its manufacturing activities is very important. Additionally, given the capital requirements, labor requirements and lack of threat of technology piracy, contract manufacturing through independent, third party, local manufacturers is the most suitable way. Accordingly, Nike had chosen to outsource its manufacturing to contract manufacturers and presently has over 700 contract manufacturers in its supply chain (Nike-c, 2008). PESTLE framework and drivers of Globalization PESTLE framework is one of the most well known strategic management tools for environment scanning. The PESTLE framework consists of the parameters – Political, Environmental, Social, Technological, Legal and Economic. Political: Nike is primarily a US company with US being its most important market as well as the hub of its design, research and development activities. The political scenario in US is highly stable and conducive to business. It has a stable political system, low interest rates and a very stable financial system in place. All these factors give Nike an excellent platform for growth. Economic: The economic factors influencing Nike form a mixed bag. The fact that US is the largest economy and among the most stable ones, has given Nike the advantage of a huge domestic market. The per capita income and also the disposable income is among the highest. This, coupled with the fact that US has a high population has driven up the total market size. However, the growth rates are low, especially as compared to big emerging economies like China and Russia. Besides US is prone to recessions as has happened in 2008-2009. Social: The social and cultural trends of US, Nike’s biggest market are one of the core strengths of Nike. Healthy living is an ingrained cultural trend, and sports and athletics command strong following among the youth. Also, US as a market is more demanding in terms of innovative and better products, thereby giving a specialty player like Nike a strong domestic market. However, in the last decade, Nike has faced strong negative publicity from various organizations due to child and forced labor. While Nike had initially distanced itself from the appalling working conditions of its manufacturing facilities that are owned and managed by third party sub-contractors, Nike has, since then, introduced various measures to ensure better working environment and wages of its contract manufacturing units. Technological: The domain of sports, and hence sports apparel, is highly influenced by technology. Nike has leveraged this factor by investing heavily into research, development and design. Environmental: Given that Nike has minimal manufacturing facilities in US, this factor has minimal effect on the functioning of Nike. However, there has been lot of negative publicity as quite a few of the contract manufacturing facilities of Nike have violated environmental safety standards. However, the company has taken sincere measures towards increasing its social responsibility and has recently been ranked among the most environmental friendly companies in the world (Zabarenko, 2007). Legal: Just like the environmental factor, Nikes comes clean in the legal factor in US. However, Nike’s contract manufacturing facilities have been previously accused of employing child laborers. Porters Diamond Model Porter’s diamond model analyses the factors that make a business organization competitive. The model takes into account four broad factors that influence the competitiveness of a region. The six factors mentioned in the model are Demand conditions, Factor conditions, Related and supporting industries and Firm strategy and rivalry. Apart from these two factors, there are other two factors that influence the competitiveness of a firm as well as a region – government and dynamism of the system. In effect, Porter’s diamond model stresses that the core to competitiveness of an organization is its ability to innovate (Massachusetts Institute of Technology, 1991). Nike as an organisation has been extremely agile and has been able to forecast as well as set industry trends. Nike has constantly improved and innovated and this has resulted in a vastly improved product line for Nike. Sports foot-ware market Though Nike have been the pioneer of a globalised supply chain in the sports footware market, its competitors were fast to adopt the trend (Dusen, 1998). The sports shoe market in USA, for example, is dominated by a few large brands. The biggest among the two brands, Nike and Reebok, outsource 100% of their requirement from contract manufacturers spread all over the world, primarily Asia. Other players like Reebok, Puma and Fila have a mixed manufacturing policy where though a large part of their requirements are outsourced from Asia based manufacturers, these companies do have some US based manufacturing facilities. Only one among the top 6 players, New balance, has a substantial manufacturing set up in US. Conclusion: As mentioned earlier, globalization is an irreversible process and will continue to influence the business landscape. Business organizations like Nike have leveraged globalization to emerge as industry behemoths in just about 45 years, and other companies are increasingly adopting globalization to become more competitive. While world economies have morphed and improved along the value chain, destination of low cost contract manufacturing has changed. While Japan was the initial low cost manufacturer, it was soon replaced by South Korea and subsequently, Taiwan. At this moment, ASEAN countries like China, Pakistan, Cambodia, Vietnam, Thailand, India and other countries like Mexico are the new favorites. The location of outsourced manufacturing may change, but globalization will remain a critical component of almost all businesses. With benefits of globalization tricking down to emerging economies, globalization is slowly becoming more than just contract manufacturing or outsourced back office. Emerging economies like China, Brazil, Russia and India are fast becoming the engines of worldwide growth and are turning out to be lucrative and sizable markets for products that were once consumed only in Europe and the US. Companies like Nike and General Motors have designed and launched products specifically aimed at these emerging countries, and technology companies like Google and Microsoft have opened their engineering and R&D campuses in Asia. So, it may be concluded that globalisation has been instrumental in bringing about the desired changes without which businesses round the world would not have been the same as they are today. Reference Locke, R. Siteman, A. No Date. The Promise and Perils of Globalization: The Case of Nike. Massachusetts Institute of Technology. Available at: http://web.mit.edu/polisci/research/locke/nikepaperFINAL.pdf [Accessed on January 11, 2010]. Nike-a. No Date. Company Overview. Available at: http://www.nikebiz.com/company_overview/facts.html [Accessed on January 11, 2010]. Nike-b. No date. Workers in Contract Factories. Available at: http://www.nikebiz.com/responsibility/documents/3_Nike_CRR_Workers_C.pdf [Accessed on January 11, 2010]. Harrington, J. 2003. Forms of International Business. University of Washington. Available at: http://faculty.washington.edu/jwh/349lec12.htm [Accessed on January 11, 2010]. Nike-c. 2008. Nike Contract Factory Disclosure List. Available at: http://www.nikebiz.com/responsibility/documents/Nike_CRR_Factory_List_C.pdf [Accessed on January 11, 2010]. Zabarenko, D. 2007. Canon tops list of climate-friendly companies. Reuters. Available at: http://www.reuters.com/article/idUSN1840883720070619?feedType=RSS [Accessed on January 11, 2010]. Massachusetts Institute of Technology. 1991. Towards a Dynamic Theory of Strategy – Michael Porter. Available at: http://ocw.mit.edu/NR/rdonlyres/805593F6-D57A-405E-A46D-CF74681EC56E/0/dyn_theo_strat.pdf [Accessed on January 11, 2010]. Dusen, V. 1998. The Manufacturing Practices of the Footwear Industry: Nike vs. the Competition. Available at: http://www.unc.edu/~andrewsr/ints092/vandu.html [Accessed on January 11, 2010]. Bibliography Worthington, I. Britton, C. 2006. The Business Environment. Financial Times Prentice Hall. Dicken, P. 2007. Global shift: mapping the changing contours of the world economy. SAGE Publications Ltd. Read More