Business 478

Section D600

CASE SYNOPSIS FOR:

Nike

Student Name: Alison Ho Yee Lee

Date: October 19, 2015

Nike, Inc. was founded as an importer of Japanese shoes. By 2015 the company has grown to be the

worlds largest marketer of athletic footwear (Reference for business, 2015). The market that Nike has reached

includes the USA and the rest of the Americas, the Middle East, Europe, Asia Pacific and Africa (Nike Inc.,

2015). The mission of Nike is to bring inspiration and innovation to every athlete in the world (Nike Inc., 2015).

Nikes precursor originated in 1962, a product of the imagination of Philip H. Knight (Reference for

business, 2015). Knight contracted with a Japanese firm that made athletic shoes, the Onitsuka Tiger Co. Knight

created Blue Ribbon Sports (BRS) in the course of setting up his agreement with Onitsaka Tiger and BRS

eventually grew to become Nike, Inc. (Reference for business, 2015). In the beginning of 1970s, BRS was able to

manufacture its own line of products overseas and introduced its Swoosh trademark and the brand name Nike. In

1974, BRS opened its first U.S. plant and further sought to expand the variety of its products (Reference for

business, 2015). In 1978, the company changed its name to Nike, Inc. (Reference for business, 2015). By the

1980s, Nike expanded to the European market. By 1982 the companys line of products included more than 200

different kinds of shoes, including the Air Force I, a basketball shoe, and its companion shoe for racquet sports,

the Air Ace (Reference for business, 2015). Through product diversity, Nike has become a global sportswear

leader. In 2014, Nike Inc. was the largest apparel and footwear company in the world. The companys global

value share is 2% (Euromonitor International, 2015).

Nikes market leadership can be contributed to its brand image and loyalty. Despite having a solid

reputation for innovation, Nike has also developed celebrity endorsements to enhance its brand loyalty

(Euromonitor International, 2015). Nike has also taken the advantage of using social media such as interactive

apps and websites to keep consumer awareness of brand development high (Euromonitor International, 2015).

ENVIRONMENTAL ANALYSIS

Industry Environment

Bargaining Power of Suppliers: Moderate

Nike depends on inputs of fabrics like cotton, polyester and plastics for shoes and accessories, and

technological items for its FuelBand SE product (Nike+, 2015). Nikes suppliers have bargaining power because

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Nike is highly dependant on material inputs. On the other hand, Nikes product line is highly diversified and

products are made with outsourced labour. These moves reduce the companys dependence on particular

suppliers. These two opposing forces cancel each other out to make the bargaining power of suppliers moderate.

Bargaining Power of Buyers: Low

Nike does not rely on particular product line or single national market to make profit. It achieved

high sales in China. According to CFO Andrew Campion, China will help the brand reach $50 billion in

annual revenue by the year 2020 (Garcia, 2015). Nikes success in entering other emerging markets

means it relies less on buyers in the United States or established markets All of these elements thus

contribute to a low bargaining power for the buyers.

Threat of Substitution: Low to Medium

According to Trefis, the intensity is low to medium regarding to the threat of substitute products

(Trefis Team, 2013). The worldwide demand for athletic footwear, apparel and equipment is expected to

grow in the future as customers cannot substitute for these products (Trefis Team, 2013). Continuous

innovation and introduction of new products means that it is more difficult for the black market to quickly

counterfeit the latest products.

Threat of New Entrants: Moderate

Non-athletic apparel companies may choose to diversify into athletics, and new companies can

outsource production for new shoes or clothing products at low cost. The potential that new players will enter the

industry is increased because there are few barriers. However, Nike has diversified its business and created new

product divisions using new technology. For example, the Nike+ line uses 3D printing to create customized shoe

designs and revolutionize its product distribution system so new entrants in its core product areas pose less of a

threat (Alcopra, 2015). Its technological product innovation reduces the threat of new entrants to moderate.

Industry Rivalry: High

There is high industry rivalry between the major players in Nikes core market of athletic

footwear and apparel. New Balance, Adidas, and Puma are all very strong sportswear manufacturers that

directly compete with Nikes offerings. Despite of the major players in sportswear industry, Nike has to

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consider the emerging competitors. Rising competition from emerging players such as Under Armour and

Lululemon Athletica, which focus on niche market segments such as performance apparel and yoga-

focused apparel, also pose a threat to Nikes share of selected market (Trefis, 2013).

General Environment

Economic segment

Although the global economy has been very unstable recently, it still does not affect customers

willingness to spend money. In America, between September 2014 and September 2015, there was an

obvious increase in peoples spending on retail and food services. The number climbed from $437 billion

dollars to $447 billion dollars (CNBC, 2015). The positive trend explains that the demand for retail goods

and foods have been slowly increasing, and consumers spending appears to be growing at a fairly steady

pace. More growth is expected in the next three months.

Technological segment

Since the use of the Internet is increasingly common, more consumers are using online shopping.

By shopping online, consumers are able to compare products in different online stores. Consumers can

also save time and energy while doing online shopping at home, school, or work. Moreover, consumers

do not have to worry about their credit cards being misused or processed with unauthorized transactions if

they use a service like Paypal to pay for their purchases (PayPal, 2015). PayPal is an online payment

service that allows individuals and businesses to transfer funds electronically and has been proven safe

and secure (Crawford, 2015).

Global segment

Globalization creates many benefits to businesses who intend to go across national boarders. The

most beneficial consideration is cost reduction. When businesses enter international markets, foreign

exchange allows more products and services to be available, while also lowering costs, because of

specialization (Benefits of Globalization, 2015). Moreover, some Companies are moving towards

developing countries to acquire cheap labour. This not only gives the company comparative advantage,

but also creates employment and income generation to the people in the host country.

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Demographic segment

There are a growing number of people who exercise daily and seek healthier lifestyles. This trend

increases the demand of simple and comfortable clothes. In addition, there are more different age-groups of

people try to get involved in daily exercises. For example, some children start involvement in sports at a very

early age because of parental influence. At the other end of the spectrum, there are seniors who try to exercise

in order to prevent diseases or maintain their independence as they age (Benefits of Exercise, 2015).

CURRENT SITUATION

Brand Value

Nikes main source of comparative advantage stems from its brand value and its R&D. Nike utilizes

their swoosh logo and the Just Do It trademark to have extremely high brand recognition and brand value.

Nike makes it a priority to inspire their customers with the Just Do It and Everyone with a body is an

athlete tag-lines. Nike is ranked 18th in the Worlds Most Valuable Brands 2015 by Forbes. This indicates that

Nike is able to generate massive earnings in industries where branding plays a major role (Forbes, 2015).

Research & Development (R&D)

The Nike Explore Team Sport Research Laboratory brings more than 250 years of sport research

experience to the company and it allows Nike to drive product innovation for athletes worldwide (NIKE Inc,

2015). Nike Flyknit technology rose on the stylization of fitness and became the sporty alternative to the street

sneaker. Nike does own a great many patents covering the Nike Air cushioning technology. From the Nike Air

running shoes models to Lunarlon foam material, Nike has gained huge brand recognition in the sports industry

(Loda, 2015). In Spring 2015, Nike updated the Nike Tech Pack collection with Nike Tech Aeroshield to provide

a lightweight barrier between athletes and their temperate surroundings (NIKE Inc, 2015). Meanwhile, Nike also

developed its Fuel Band fitness tracker and its own associated app, Nike + (Rougeau, 2015). Nike diversified the

function of its footwear design and has penetrated its brand into the apparel and wearable technology industry.

Supply Chain Network

Nikes manufacturing network consists of over 700 factories in over 40 countries around the

world, allowing their inbound logistics to be efficient and cost effective (Leland, 2015). Yet, Nike does

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not own factories for manufacturing its footwear and apparel. Instead, manufacturing is outsourced to

third parties. Independent contract manufacturers manufacture both Nikes footwear and apparel outside

the US. Manufacturers in Vietnam, China, and Indonesia accounted for most of the footwear production.

By 2014, Nike had 5 primary distribution centres in the US and 16 distribution centres outside the US

These centres insure that the outbound logistics of their products are quick and efficient (Soni, 2014).

Financial Performance

Nikes net income earned for the quarter ending August 31st 2015 was $1179 million This was an

increase of 23% compared to same quarter last year (NIKE Inc., 2015). Diluted earnings per share (EPS)

have also increased by 23% to $1.34. EPS is an indicator of firms profitability. We can observe that Nike

has better profitability than last year since there is higher gross margin ratio, lower operating expenses

and lower tax rate. Currently, Nikes target is to reach $50 billion sales by 2020 because it believes the

trend of woman in sports and e-commerce will help it to achieve that goal (Zack, 2015).

Nike is the leading company in athletic footwear with 33.5% market share (Soni, 2014). The main

source of revenue is from footwear in the North American market. China is a potential growing market

for Nike as the revenue earned from there has increased by 36% over last year (NIKE Inc., 2015).

CURRENT STRATEGIES

Business Level Strategy

Cost Leadership

Nike management has outsourced all their shoes and apparel manufacturing outside the United

States (Brian, 1995) and is now cooperating with over 785 contract factories all over the world (e.g. in

Vietnam, China, and Indonesia) (Nike, 2014). Taking advantage of lower salary expenses, outsourcing

makes up over 80% of Nikes revenues. Thus, Nike management can invest the extra profits into R&D

and postproduction activities. Such activities would include marketing and distribution and sales. These

activities, in turn, increase the potential for company growth (Brian, 1995). Outsourcing helps Nike

reduce their operating costs effectively and increase their competitiveness (McDaniel, n.d.). Thus

outsourcing enables Nike to price its brand at a competitive rate with other competitors in the industry.

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Product differentiation

Nike management has a clear differentiation strategy. This strategy is to establish the company as

the standard in athletic wear (Martin, 2014). Their product differentiation is built on the power of the

brand, the relationship with well-known athletes and its high quality products (Zook, 2011). The Nike

Brand is the most powerful asset in their portfolio, accounting for almost 85% of total revenue (Nike,

2010). Nike has positioned itself not only as a leading athletic brand, but also as an influential fashion

brand (Martin, 2014). Through sponsorship advertisement with well-known athletes, customers are

compelled to purchase their athletic wear for competitive and recreational use (Silvestri, 2015). With their

great brand management, Nike provides an increased perception of their unique products (Thousand

Insights, n.d.). Even with a few differences compared to other products, Nike can still win loyal customers.

Corporate- Level Strategy

Innovation

Innovation is at the heart of Nikes business growth strategy (Nike,2015). Nike continuously

focuses on delivering innovative new products and experiences in a more sustainable way. They

emphasise R&D to offer unique products to the athletes. For example, The Nike Sport Research Lab

(NSRL) is where athletes, scientists, engineers and designers converge to develop the key performance

insights that drive Nikes innovation. In the NSRL, the focus is on biomechanics, physiology, perception

and athletic performance (Nike, 2013). Nike aims to produce athletic equipment that can eliminate injury

and maximize comfort with their science insights. Besides, Nike has developed Nike+, a fitness tracking

platform for users to track their exercise progress by apps and sport watches (Nike, 2015). Also, Nike lets

customers to customize their unique shoes with the idea of Design your own Shoes (Nike, 2015).

MAIN STRATEGIC CHALLENGES

Expanding in Womens Apparel Market

With increase in disposable income levels and rising living standards worldwide, there is increased

demand for sports apparel made of advanced high-quality fabrics. The business analysts forecast the Global

Sports Apparel market predicts that the market will be growing at a compound annual growth rate of 4.32%

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over the period 2014-2019 (PR Newswire, 2015a). The womens lines in Nike represents 20% of Nikes total

revenue and is expected to continue to outpace the mens lines in term of growth. The crossover between

fashion and exercise has lead to more women becoming active and incorporating gear sold by Nike into other

aspects of their lifestyle (PR Newswire, 2015a). There is a potential for Nike to expand its business in

womens apparel market. Yet Nike faces competition from both traditional sports brand rivals and those

producing fashion brand youth-focused apparel. Nikes peer, in athletic wear, Under Armour, is actively

diversifying its sports lines and it is growing more quickly than Nike. As well fashion retailers like Forever 21,

H&M and Urban Outfitters have introduced over 100 active wear items for women (Kell, 2014).

Expanding in China Market

From Nikes August 31, 2015 quarterly financial report, we can observe that the expectation of

future growth in China is 22% (NIKE Inc., 2015). Revenue earned in China is $886 million, which is a

30% increase over last year. Strong economic growth in China represents a great opportunity for Nike to

earn enormous profit there (BBC News, 2015).

However, cultural barriers will be the main challenge that Nike face during expansion. Nike needs

to design strategies to increase its visibility and popularize its brand name. For example, Nikes current

branding is based on famous sport stars sponsorship. But it may not work as effectively in China because

academic achievement is being emphasized more than sports achievement (Trefis Team, 2015). Designing a

strategy that suitable for Chinas culture affects whether Nike can gain more market share in China.

Intense rivalry is also a challenge for Nike. Competitors like Adidas and Under Armour want to

develop in the Chinese market as well. With better positioning strategy, Adidass market share in China is

getting closer to Nike (Forbes, 2014). How Nike utilizes its strengths and designs a suitable advertising

strategy will a challenge for Nike to come out ahead of its competitors.

Strengthening Competition

The main competitors in sportswear sector for Nike are Adidas, Reebok, Puma, Fila and Under

Armour (Mahdi, Abbas and Mazar, 2015). Facing such intense competition, customers may easily switch

brands because of better price, higher quality or newer styles (Mahdi, Abbas and Mazar, 2015). Although

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Nike is still the leader in the footwear market, Nike has to beware of the threat of substitutes to maintain

its market share. Euromonitor 2015 highlights that Nike faces long-term challenges to maintain global

share (Euromonitor International, 2015).

Intense rivalry in the athletic equipment industry has been a major challenge to Nike. For

example, Under Armour has become a strong competitor to Nike in recent years. Nike earns $27.8 billion

annually, while Under Armour earns far less, only $3 billion (See Figure 1 in appendix) (Peterson, 2015).

The latter has been expanding rapidly with an incredible 32% increase in their sales in 2014 (Nazario,

2015), and even surpassed Adidas to become the second-largest athletic apparel company in the US

(Mirabella, 2014). Business Analysts are also optimistic on Under Armours long term potential in

footwear (Bidness Etc, 2015). Moreover, Under Armour has been aggressively gaining ground with the

NBA. Under Armour will become the official clothing outfitter for the NBA Draft Combine in 2018. This

invitation-only showcase in where leading draft prospects participate in athletic testing, five-on-five

games, and interviews with teams ahead of the NBA Draft (PR Newswire, 2015b). This endorsement

will give Under-Amour it an introduction to new players and could eventually threaten the position of

Nike as the leagues official on-court apparel provider (Rich, 2015).

Figure 1: Revenue Performance of Nike versus Under Armour

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