Investigation of Footwear Industry: Nike Incorporated's Strategic Decision Making - Report Example

Running Head: Investigation of Footwear Industry: Nike Inc. Strategic decision making, Financial position and Market share characterized competition. By Name: Institution: Instructor: Module: Date: Abstract Nike has been voted among the top five most recognized brands globally for the last five years. Such success has not been achieved by coincidence but the sheer dedication of the management by utilizing resources at their disposal and strategic business management knowledge. Embracing changes in technology, changes in consumer taste, globalization among other developments in the market have not prevented the company from posting impressive financial reports. As of 2008, the company recorded revenues of $4.6 billion for its 2009 second quarter registering a 6% growth year on year on despite the hard hitting global recession (Nike). Business analysts have used the company as a benchmark for marketers most notably through the “Just Do It” campaign that commenced in 1980’s. Table of Contents 1.0 Introduction 1.1 Background of the Organization 2.0 Environmental Analysis 2.1 Pestle analysis Economic Social Technological Demographic 2.2 Five forces analysis Supplier power Buyers’ bargaining power Threats of new entrants Substitutes Competitive Rivalry 3.0 Organisational analysis 4.0 Current strategy 5. 0Gap analysis 6.0 Conclusion and Recommendations References Appendices 1.0 Introduction The modern business environment is dynamic and characterized by limited time periods, niche opportunities and presence of ever increasing risks. This requires precise decision making following insightful market analysis and competent strategies to achieve set organizational objectives. Globalisation has seen high octane ventures metamorphosing constantly into global empires. Therefore, responsibility imposed to senior management is huge in terms of individual strategic management. This paper thus is a strategic analysis of the management style at Nike Inc specifically within the last five years (Nike, 2009). 1.1 Background of the Organization The company was founded in 1962 by Phil knight and Bill Bowerman as joint partnership operating as Blue Ribbon Sports. They had set objective of distributing high quality, low-cost Japanese athletic footwear for consumers in America, dominated then by Germany. Nike expanded into variety of sports apparel, by 1990, consolidating its revenue surpassing $2 billion mark and with over 5,300 workers across the globe (Enderle, Micka, Saving, Shah, & Szerwinski, 2000). In 2000, Nike Inc. became a global market leader in distribution and manufacturing of sports footwear with elaborate distribution channels incorporating both modern and traditional distribution channels spread to over 160 countries (Nike Inc., 2008, Schultz, 2007). Growth was mainly attributed to improved shoe technology and better marketing campaigns. Endorsements by celebrities in the likes of Michael Jordan, Will Smith, Lance Armstrong, Tiger woods, and professional women basketballers (WNBA) further extended Nike’s global brand positioning (Enderle et al, 2000). 2.0 Environmental Analysis Pestel analysis Political For example, under the Bill Clinton regime, trade embargo was place on Vietnam in 1993, this resulted to corporations donating to the Democratic National Committee in order to lift the embargo, presence of Nike’s name on that list led to unfavourable image especially when the embargo was lifted against the POW/MIAs families. In addition Nike facilities in Vietnam experienced what is called “sweatshop” which negatively spoiled Nike’s image. Following the events September 11, combined with policies of Bush administration, created another challenge on brand loyalty especially in Asian markets (Enderle et al, 2000). Economic Nike Inc. has a strong research and development agenda in their management. This enables the company to promptly adapt to new trends in the market and at the same time incorporate technologic advancement in the process. This improves products quality and lowers costs of operations. Timely evaluation of internal structures and processes has ensured stability at the company (Enderle et al, 2000). Nike’s production locations gained bad reputation and publicity at the turn of the century, as a result of its weak environmental policies then, which overlooked corporate social responsibility leading to declining sales. However, the company responded aptly reversing the bad publicity as an opportunity to redeem itself (Stonehouse & Minocha, 2008). This has expanded its market share placing it on top of manufacturers of quality products (Enderle et al, 2000: Brause & Locke 2009). Global financial crisis that created global imbalances, Nike was not been spared and its retail consumption and sales in the fiscal year ending May 31st 2009 stood at 19.2 billion from a revenue increment of only 3% and reduction of income of 21% to $ 1.5 billion. However, growth in Asia and emerging markets has stimulated growth of sales. Nike allocates 11% to 13% of revenue investments for marketing on annual basis (Nike, Inc., 2008). The recent global recession has presented a challenge to all organisations as aggregate demand drops and consumers are more conscious on products pricing. This has presented pricing challenges for the company (Nike). On the other hand, Nike has been constantly targeted about its environmental record and employee working conditions. This has negatively impacted on the brand. In response, the company quickly implements correctional measures while the management seeks to develop pre-emptive measures (Nike Social Changes in lifestyle has played significant role in the company’s success story. Since the 1980’s during the fitness craze, Nike optimised the opportunity by empowering people to “just do it.” The acceptance of western culture outside the US such as in Asia and Latin America propelled the company’s brand as a symbol of the western culture (Locke & Siteman 2008). Technological The industry has dynamically changed, creative and innovative new entrants have room to manoeuvre by adopting internet and digital marketing strategies. These changes of distribution and marketing strategies have significantly diminished entry barriers generating fierce rivalry and product substitutes. In contrast, for an established footwear company to exit the market, the firm faces challenges of indebtedness and meeting obligations emanating from claims on residual assets or stakeholders lawsuits (Enderle et al, 2000). Demographic Nikes success was propelled by the spending powers of the baby boomers in the 1980’s which also coincided with the fitness craze. With this generation retiring and no longer active in fitness as compare to the younger generation, Nike has to alter their target markets. Baby boomers are estimated to be 77 million in America alone born between 1946 and 1964. Their annual spending power is estimated to be more than $2 trillion (Kearsley, Mezias, Ternay, Young, C. & Young, R., 2006). 2.2 Five forces analysis Supplier power From 2004, Nike designed strategies of developing company-owned retail outlets or stores (Appendix 2). This strategy has successfully improved the company’s profit margins. For this reason, Nike could now sell at retail price unlike the wholesale price. The shifted to non-athletic stores reveal a reflection on the consumer preference of low-performance footwear. Another market force is the emerging markets and growth of China. Following decline in European and global footwear market, In China growth has surpassed double digit for Nike products. This is because of China’s upsurge in economic growth and increasing middle class Chinese. Nikes sales in China alone increased to 50% by 2008 due to increased production factories in Asia hence viewed as a local brand (Locke & Siteman ). Turkey, Brazil and Russia are some of the emerging markets that have pushed the current market trends in the footwear industry (Gong & Zhang, 2007). Buyers’ bargaining power The company has a wide range shoes and apparel that vary in prices thereby eliminating buyers power. On the other hand the firm has been keen to cut down on the cost of production in order to keep the prices of their products low by transferring their factories from America a to Asia where labor costs are low. Threats of new entrants Nike’s strong brand name and dominance in the global footwear market deters other small shoe makers to earn a significant niche of the market share. Since the industry has no natural barriers, the domination by the old brand names such as Nike, Adidas and Puma that have over time been associated with quality and performance locks out small players Nike has also sponsored numerous national teams at major international sporting events denying other players marketing opportunities. Substitutes The association of Nike with fashion has meant that buyers have not been fully receptive to the brand in some regions. On the other hand, Nike has done very little to incorporate localised culture in their brands in various regions. Consequently Nike is viewed as an icon of westernisation more so in culturally rigid societies such as Arabic countries. Therefore, Nike products as easily substituted for other culturally acceptable brands. Again, there exist little product differentiation between Nike and her competitors. Competitive Rivalry Nike’s footwear category currently lead global market share by 34%. Nike holds its current top position courtesy of innovative products, quality production and aggressive sales promotion. The company has strategically targeted good performing sports celebrities such as Michael Jordan and Tiger woods be brand ambassadors. However, to target non- sport enthusiast part of the market, the company expanded its reach by including Will Smith as a brand ambassador also. Competition is fierce both in the domestic and international markets. Rebook, Adidas and Puma are the main competitors for Nike. They target the same market segment as Nike though they have a longer presence in the industry than Nike. However, Nike did not seek to market its product by competing with its competitors. This is most notable by the “just do it” slogan that has no reference to the product itself. This mode of marketing sought to empower individuals, either in sports of wherever to believe in their potential where the comfort of Nike shoes would facilitate achieving whatever they aspired to do (Moody, 2005; Kearsley, et al 2006). 3.0 Organisational analysis - Resources and capabilities Sales for Nike brands have substantially grown by 52% from 2005 to 18.6 billion in 2009. The rapid rise in sales is attributed to increase in consumption rates from emerging market blocks like China and Russia. For example sales for Turkey and Russia rose by 25% in the EMEA segment, while revenue increase from China was over 50% in the course of 2009. On regional level, Asia pacific sales climbed by 26% in 2009, second was South and Central America which posted 21%, US 4%, and EMEA 19% growth rate. According to the current status, the company gross margin increased by 45%, this was attributed to increase in slight rise on products market price and decrease in close-out sales. This was contributed by better management of inventory in 2009 (Wikinvest, 2009). Furthermore, Nike increased advertising costs by 15% which in turn increased SGA expenses in the run-up to 2008 Beijing Olympics and football championship in Europe. This is because footwear industry is cyclically sensitive to economic cycles and events. In the same period, Nike earnings in net income were $1.88 billion which marked 100% increase compared to the financial status of 2005 (Appendix 3). This represents increase 26.3% and is attributed to significant measures on tax savings emanating from Nike’s purchase of Umbro. With the improved gross margin realization, the company operated at 10.1% net profit margin in 2009, compared to 9.1% in 2008. Key contributing factor was increased prices (Wikinvest, 2009). Although rarely discussed, Nike has been involved in making strategic alliances with marketers and other footwear manufacturing firms. Bhattacharjya & Walters (2009) note Nike’s strategic alliance with Benniton and other firms as an issue that the modern business environment offers a competitive edge in the face of globalization 4.0 Current strategy The success of Nike has been facilitated by extensive marketing. The firm recognised the popularity of western culture and the influence celebrities have on the masses. The result saw the sub-branding of products such as Jordan Air shoes. The use of celebrities also increased brand recall. Again the simplicity of the Nike swoosh has added curiosity to wearers (Rossiter & Bellman, 2005). The company has been consistent in its advertising constantly drawing on the non sports market. The firm marketed its footwear as good enough to be an every day wear and not a sport wear only. A closer look at the adverts shows that the company did not seek to promise product performance but aimed a creating a self belief and sense of belonging ( Walker & Cox 2008). A look at a video advert on Youtube named “I Got Soul But I'm Not A Soldier” summarizes all the outlooks of Nike into the market as that beyond the sports arena (Spot Nike Courage). Nike brand reduces advertising costs inherently due to it recognition on global market combined with extensive distribution networks such that every dollar spent for advertisement generates sales in numerous stores across the globe. For example in 2008, Nike spent $ 2.8 on ads and generated 12.4% revenue (Crain & Abraham, 2008). Nike continues to stir the apparel industry in terms of fashion savvy market by initiating five structures targeting Women, Men, Kids, Sports graphics and caps, and strategic response independently (Appendix 1). Although price is one of consumers’ determinants, Nike has distinguished it products, putting emphasis on high quality and thus fetch higher prices compared to competitors. Alternatively, Nike’s Nike alpha project led a revolutionary design of new affordable shoes for all levels of income (Nike, Inc., 2008). Nike has a strong organisational culture embedded by the company values. This forms a strong and solid management strategy rich in workers loyalty and teamwork. Activities and feelings at the company’s headquarters in Beaverton Oregon justify this assertion because employees are regarded as players while supervisors referred to as coaches and company meetings called huddles (Nike, 2009). 5.0 Gap analysis However during the first quarter of 2009, advertisement costs increased to 39% because of the cyclical marketing link to the run up to Beijing Olympics (Wikinvest, 2009). The company stands accused of bad labour relations record with accusations of use of child labour in Chin and India. In South Africa also, the firm was accused of exposing employees to dangerous chemicals without proper protective equipment. Some of Nikes marketing initiatives have deviated from marketing the brand to marketing a sport. Basu, & Palazzo (2008) note that mush of the firms CSR is viewed as sponsoring and promoting a given sport other than the firms products. 6.0 Conclusion and Recommendations In conclusion, Nike’s achievements and successful strategic marketing is attributed to the inability for its products to be replicated, distinguished unique key performance indicators, brand power, deep integration in World and American culture and the slogan’s and Nike trademark which serves as the company’s fingerprints. This paper recommends as follows, first, over reliance on sporting icons like Michael Jordan is a risky strategy, because sales started to dwindle immediately he departed from sporting. Secondly, Marketing strategies ought to address key needs and taste of consumers to gain appreciation and appeal to the ads. The company needs improvement in its public relations and corporate affairs, there has been cases of public displeasure and outrage due to labour and manufacturing practices. For example underage employment in offshore factories, workplace conditions needs further improvement and streamlining of wages (Lydia, 2005). References Basu, K. & Palazzo, G. (2008). Corporate social responsibility: a process model of sensemaking The Academy of Management Review. Retrieved on October 6 2009 from Google Scholar Bhattacharjya, J. & Walters, D. (2009), The emergence of interactions as strategic entities in value chain networks. Retrieved on October 6 2009 from http://itls.econ.usyd.edu.au/downloads/working_papers/itls_wp_09_11.pdf Brause, A & Locke, R. (2009). Lessons from Nike, Industrial and Labour Relations. Retrieved on 6th October from Harvard database Crain D. & Abraham, S. (2008). Using value-chain analysis to discover customers’ strategic needs, Strategy and Leadership Journal. 36 (4) Retrieved on 6th Oct 2009 from Emerald Insight database Enderle, K., Hirsch, D., Micka, L., Saving, B., Shah, S., & Szerwinski. (2000). Strategic Analysis of Nike Inc. DePaul University, Chicago. Retrieved on September 30, 2009 from http://condor.depaul.edu/~aalmaney/StrategicAnalysisofNike.htm Fibre2 fashion (2009). Futures orders for Nike Brand decline. USA. Retrieved on September 30, 2009 from http://www.fibre2fashion.com/news/fashion-company-ews/newsdetails.aspx?news_id=74172 Grainger, D. A., & Andrews, L. D. (2003). Postmodern Puma. Media and Culture Journal. 6 (6). Retrieved on September 30, 2009 from Media Culture Organisation database Gong, L. & Zhang, M. (2007). Study on the Methods and Applications of Strategic Management Accounting. International Journal of Business and Management. Retrieved on September 30, 2009 from Canadian Center of Science and Education database Kearsley, L., Mezias, L., Ternay, R., Young, C. & Young, R. (2006). Nike : “JUST DO IT” Marketing Plan Term Paper Marketing Management. Retrieved on September 30, 2009 Rowan database Locke, R. & Siteman, A. (2008). The Promise and Perils of Globalization: The Case of Nike. Retrieved on October 6 2009 from, http://web.mit.edu/polisci/research/locke/nikepaperFINAL.pdf Lydia, S. (2005). Nike list ignites intense debate on labour issues. Retrieved on September 30, 2009 from HighBeam Research database Nike, inc. (2009). Reports fiscal 2009 fourth quarter and full year results. 503, 671-6171. Retrieved on September 30, 2009 from, http://www.nikebiz.com/media/pr/2009/06/documents/NKE-Q409EarningsPressRelease.pdf Nike, Inc. (2008). Reports Fiscal 2008 Earnings Per Share of $3.74: Fiscal Year Revenue Up 14 Percent, Earnings Per Share Up 28 Percent. Retrieved on September 30, 2009 from, http://phx.corporate-ir.net/phoenix.zhtml?c=100529&p=irol-newsArticle&id=1169546 Moody, R.J. (2005). Nike, Adidas buy firms. Portland Business Journal. Retrieved on September 30, 2009 from Portland database Researchandmarkets. (n.d.).Brochure: Financial Analysis-Nike Inc. Retrieved on September 30, 2009 from http://www.researchandmarkets.com/reports/689317/ Rossiter, J. & Bellman, S. (2005). Marketing communications: theory and applications, New York: Prentice Hall Schultz, C. (2007). Marketing as Constructive Engagement, Journal of Public Policy & Marketing, 22 (2) 293-301, Retrieved on September 30 from the American Marketing Association database Spot Nike Courage (nd) "I Got Soul But I'm Not A Soldier" - Just do It, Retrieved on September 30, 2009 from http://www.youtube.com/watch?v=YA90NutSKvg Wikinvest. (2009). Wiki Analysis. Retrieved on September 30, 2009 from www.wikinvest.com/stock/Nike Stonehouse, G. & Minocha, S. (2008) Strategic processes at Nike, Knowledge and Process Management Journal, Wiley database Walker, A. Cox, J. (2008). Incorporating global characteristic data into virtual; product development models, Journal of Computer-Aided Design and Application Journal, 5 (6) 900-920, Retrieved on 6th October Springer Link database Appendices Appendix 1 shows how Nike shifted to fashion savvy and low performance products (Source: Nike, inc. reports fiscal 2009 fourth quarter and full year results) Figure 1 Shows Nike’s Geographical market Niche (Source: Wikinvest; Wiki Analysis, 2009) Figure 2: Represents Nike’s commanding revenue returns (Source: Wikinvest; Wiki Analysis, 2009) Figure 3: Shows Reeboks claim on global market (Source: Moody. Nike, Adidas buy firms. Portland Business Journal, 2005). Figure 4: Shows global standing on market performance by Puma (Source: Grainger & Andrews, 2003). Figure 5 Shows Nikes financial performance for the 5 year period up to 2009 (Source: Wikinvest; Wiki Analysis, 2009) Figure 6 Shows Nike’s Competitive advantage (Source: Wikinvest; Wiki Analysis, 2009) Appendix 2: Shows Nike Company-Owned Retail Stores 2004-2006 Nike Retail Locations 2004 2005 2006 %Change 04-06 Factory Outlets 204 206 193 -5.70% Nike Stores 7 19 52 86.54% Niketown Stores 15 14 14 -7.14% Employee Stores 4 4 4 0% Non-athletic stores 100 131 155 35.48% Total 330 374 418 21.05% Appendix 3 CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED MAY 31, 2008 (In millions, except per share data) QUARTER ENDED YEAR TO DATE ENDED INCOME % % STATEMENT 05/31/2008 05/31/2007 Chg 05/31/2008 05/31/2007 Chg ====================================================================== Revenues $5,088.0 $ 4,383.2 16% $ 18,627.0 $16,325.9 14% Cost of sales 2,756.6 2,464.2 12% 10,239.6 9,165.4 12% ----------------------- ---------------------- Gross margin 2,331.4 1,919.0 21% 8,387.4 7,160.5 17% 45.8% 43.8% 45.0% 43.9% Selling and administrative expense 1,686.3 1,272.0 33% 5,953.7 5,028.7 18% 33.1% 29.0% 32.0% 30.8% Interest income, net 10.7 24.2 -56% 77.1 67.2 15% Other income (Expense), net (7.5) (12.4) 40% (7.9) 0.9 -978% ----------------------- ---------------------- Income before income taxes 648.3 658.8 -2% 2,502.9 2,199.9 14% Income taxes 157.8 220.9 -29% 619.5 708.4 -13% ----------------------- ---------------------- 24.3% 33.5% 24.8% 32.2% Net income $490.5 $ 437.9 12% $ 1,883.4 $ 1,491.5 26% ======================= ====================== Diluted EPS $0.98 $ 0.86 14% $ 3.74 $ 2.93 28% Basic EPS $1.00 $ 0.87 15% $ 3.80 $ 2.96 28% Weighted Average Common Shares Outstanding: Diluted 500.1 510.2 504.1 509.9 Basic 491.4 502.8 495.6 503.8 ======================= ====================== Dividends declared $0.23 $ 0.185 $ 0.875 $ 0.71 ======================= ====================== NIKE, Inc. BALANCE SHEET 05/31/2008 05/31/2007 ====================================================================== (In millions) ASSETS Current assets: Cash and equivalents $ 2,133.9 $ 1,856.7 Short-term investments 642.2 990.3 Accounts receivable, net 2,795.3 2,494.7 Inventories 2,438.4 2,121.9 Deferred income taxes 227.2 219.7 Prepaid expenses and other current assets 602.3 393.2 ----------------------- Total current assets 8,839.3 8,076.5 Property, plant and equipment 4,103.0 3,619.1 Less accumulated depreciation 2,211.9 1,940.8 ----------------------- Property, plant and equipment, net 1,891.1 1,678.3 Identifiable intangible assets, net 743.1 409.9 Goodwill 448.8 130.8 Deferred income taxes and other assets 520.4 392.8 ----------------------- Total assets $ 12,442.7 $ 10,688.3 ======================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 6.3 $ 30.5 Notes payable 177.7 100.8 Accounts payable 1,287.6 1,040.3 Accrued liabilities 1,761.9 1,303.4 Income taxes payable 88.0 109.0 ----------------------- Total current liabilities 3,321.5 2,584.0 Long-term debt 441.1 409.9 Deferred income taxes and other liabilities 854.5 668.7 Redeemable preferred stock 0.3 0.3 Shareholders' equity 7,825.3 7,025.4 ----------------------- Total liabilities and shareholders' equity $ 12,442.7 $ 10,688.3 ======================= NIKE, Inc. QUARTER ENDED YEAR TO DATE ENDED DIVISIONAL % % REVENUES 05/31/2008 05/31/2007 Chg 05/31/2008 05/31/2007 Chg ====================================================================== (In millions) U.S. Region Footwear $ 1,143.6 $ 1,080.8 6% $ 4,326.8 $ 4,067.2 6% Apparel 447.9 437.9 2% 1,745.1 1,716.1 2% Equipment 78.2 91.5 -15% 306.1 323.8 -5% ----------------------- ----------------------- Total 1,669.7 1,610.2 4% 6,378.0 6,107.1 4% EMEA Region Footwear 889.2 757.1 17% 3,112.6 2,608.0 19% Apparel 531.1 436.0 22% 2,083.5 1,757.2 19% Equipment 113.9 98.3 16% 424.3 358.1 18% ----------------------- ----------------------- Total 1,534.2 1,291.4 19% 5,620.4 4,723.3 19% Asia Pacific Region Footwear 422.0 296.4 42% 1,499.5 1,159.2 29% Apparel 337.7 240.4 40% 1,140.0 909.3 25% Equipment 68.3 60.1 14% 242.2 214.9 13% ----------------------- ----------------------- Total 828.0 596.9 39% 2,881.7 2,283.4 26% Americas Region Footwear 202.1 169.4 19% 792.7 679.6 17% Apparel 78.9 44.7 77% 265.4 193.9 37% Equipment 25.6 20.9 22% 96.0 79.0 22% ----------------------- ----------------------- Total 306.6 235.0 30% 1,154.1 952.5 21% ----------------------- ----------------------- 4,338.5 3,733.5 16% 16,034.2 14,066.3 14% ----------------------- ----------------------- ----------------------- ----------------------- Other 749.5 649.7 15% 2,592.8 2,259.6 15% ----------------------- ----------------------- ----------------------- ----------------------- Total NIKE, Inc. revenues $ 5,088.0 $ 4,383.2 16% $ 18,627.0 $ 16,325.9 14% ----------------------- ----------------------- NIKE, Inc. QUARTER ENDED % YEAR TO DATE ENDED % PRE-TAX INCOME (1, 2) 05/31/2008 05/31/2007 Chg 05/31/2008 05/31/2007 Chg ====================================================================== (in millions) U.S. Region $ 390.7 $ 433.1 -10% $ 1,391.9 $ 1,367.3 2% EMEA Region 326.2 302.2 8% 1,266.2 1,036.2 22% Asia Pacific Region 166.0 125.5 32% 692.6 508.3 36% Americas Region 60.8 39.8 53% 239.3 192.7 24% Other 92.9 91.2 2% 336.4 299.7 12% Corporate (3) (388.3) (333.0)-17% (1,423.5) (1,204.3)-18% ------------------------ ------------------------ Total pre-tax income (1) $ 648.3 $ 658.8 -2% $ 2,502.9 $ 2,199.9 14% ======================== ======================== (Source: Nike, inc. reports fiscal 2009 fourth quarter and full year results) Read More