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5% of total liabilities. Their retained earnings, on the other hand, total $5.073 billion. The heavy use of retained earnings is partially explained by their view of themselves as a growth company. While they pay a dividend, Nike prefers to re-invest much of its profits back into expansion. They do not feel that the market has matured sufficiently to stop their aggressive growth strategy. Another consideration in their capital structure is the cost of capital. On account of its low volatility, Nike has a low cost of debt, approximately 6.8% using CAPM. Their long-term debt is primarily a revolving credit facility. The rate, based on their a+ rating, is LIBOR + 0.15%, which would equate to 4.12% based on the October 15th price of the 1-year LIBOR. If anything, Nike could become more financially efficient by increasing their use of debt financing.
Nike places strong emphasis on human resources. They have won several awards for their workplace environment and benefits. The company offers extensive athletic facilities, particularly at it Beaverton headquarters. Employees receive paid sabbaticals, and there is a job-sharing program. Consequently, Nike has positioned itself as an employer of choice, with applications in 2007 amounting to 1680% of their U.S. workforce.
Nike's operations are spread widely throughout the globe. The organizational structure is a matrix. The company is broken down along functional lines. Sales offices are dispersed geographically. Furthermore, each of the six major product line segments receives its own unit. This complex structure is set up to leverage the benefits of close relationships between unit staff and their particular area of expertise. It requires, however, significant coordination. To date, Nike has been able to achieve the level of coordination and communication necessary to maintain such a structure. Nike's ability to leverage benefits from this structure is a significant source of competitive advantage.
Nike's information systems are moderately developed. The company has strong capabilities in transmitting and interpreting data. The systems are well-built for coordination among different units. Nike does not have sophisticated it needs, as their industry is relatively low on technological development. The exception to this is supply chain management. In this area, Nike is heavily dependent on sophisticate it systems.
With 700 production facilities and tens of thousands of retail outlets, Nike has complex logistics requirements. They have a complex transportation network that brings product from their facilities to their largest markets. Nike employs the use of large distribution centers to coordinate their shipping needs. Their suppliers are responsible for procurement to Nike specs. Sanctions, tariffs and other trade barriers account for many of Nike's logistical challenges. To overcome these, they produce locally for some markets. In other markets, Nike has been forced to find alternate sources, such as was the case when the EU had significant trade restrictions on Chinese goods prior to China's ascension into the WTO.
Nike has several strengths from which it derives considerable competitive advantage. The first is the value of its core brand. The Nike brand has become established worldwide as a symbol of the athletic ware market. Nike is a market leader is many major countries, especially in its core U.S. market. The Nike brand is associated with quality, and represents the everyday approachability of athletic endeavor. Furthermore, the swoosh symbol is one of the world's most recognizable trademarks. The company has been forced to defend this trademark vigorously, illustrating its value. Few if any competitors can match Nike's brand recognition, especially on a global scale.
Another strength is their distribution network. Nike's ability to manage its production costs is largely dependent on its ability to procure from locations around the world. A Nike production contract is lucrative, and prestigious. The company's ability to effectively and efficiently manage its global logistics is one of its main competitive advantages. Additionally, the ubiquity gained by Nike's use of multiple retail channels in the domestic market is facilitated by a robust ordering system and effective domestic logistics management.
The company's secondary brands are another source of strength. With Umbro, they have a dominant brand in the world's most popular sport. This will provide Nike with significant growth opportunities in many of the world's emerging markets, and increase Nike's market share in both emerging markets and Europe. The Cole Haan and Hurley brands are strong, recording record revenues and pre-tax incomes in fiscal 2008. The Converse brand also had a strong fiscal 2008-year. These secondary brands all form part of Nike's ambitious growth strategy over the next few years.
Nike's retail strategy is another source of strength. The Nike retail stores provide high visibility, while the network of other stores provides saturation. By making Nike products so widely available, the company has been able to facilitate their growth and dominant market share. Their large, established network of regional sales offices also contributes to this strength, as they enable the company to manage its logistics, and focus sales on regional trends. The ability of Nike to keep in tune with market developments has allowed them to consistently remain ahead of the market.
Nike's ability to secure endorsements from the highest-profile athletes has been instrumental in their success. Athlete endorsements are a major component of marketing in the athletic wear industry. Some of Nike's success can be directly attributed to their ability to sign athletes such as Michael Jordan, Kobe Bryant Tiger Woods and Roger Federer. So important are such endorsements that Nike abandoned the hockey market when Reebok signed Sidney Crosby.
Nike's ability to consistently sign the most popular, successful and highest-profile athletes is a key strength that drives their marketing program.
For all its strengths, Nike does have several key areas of weakness. One is their capital structure. Nike has relied on retained earnings to drive their expansion. However, their cost of equity is higher than their cost of debt. In essence, Nike is paying too much for their investments. There are risks associated with increasing debt, and the ideal debt ratio will vary from firm to firm, but Nike's current structure is inefficient. Moreover, their financial position is sufficiently strong that increasing debt and thereby lowering their cost of capital, would not pose any significant risks provided the increases were reasonable and incremental. In their 2008 annual report, Nike stated that improving working capital efficiency was one of their short-term goals.
Another weakness is cost duplication. This is a function of their complex matrix structure. Within this structure, there are areas of overlap, where two different units are performing essentially the same, or very similar tasks. For Nike, this reduces operational efficiency and unnecessarily increases costs. If the company can streamline its operations to eliminate duplication, it can lower these costs.
Another weakness is that Nike still experiences seasonality in its revenue streams. This can make matching of revenues and expenses difficult. More balanced revenue streams would help Nike improve its operational efficiency. Moreover, it highlights an overdependence on seasonal lines. As lucrative and successful as these lines are, Nike can improve its bottom line if it can better spread their revenue streams out over the year.
Lastly, Nike has a weakness in its ownership structure. The surviving co-founder, Phil Knight, is the beneficial owner of 90% of Class a shares, which if converted would give him 18% of Class B shares. This amount of ownership concentration presents a risk to shareholder value in that Mr. Knight has the capacity to significantly depress Nike's share price should he choose to liquidate his holdings. Either a more balanced ownership structure or stronger anti-dumping provisions would better preserve shareholder value.
For such a dominant company, Nike has a significant number of opportunities available to it. The market for athletic apparel is not yet mature in the core U.S. market, and is still in a strong growth stage in many parts of the world. Moreover, Nike's expansion to date has largely been confined to the athletic apparel industry. Both of these factors, as well as some internal factors, are responsible for the multitude of growth opportunities Nike has.
One important opportunity is casual wear. As of 2006, this was the second-largest component of the athletic apparel business, and those numbers do not even reflect aspects of casual wear that are so far removed from athletics as to be considered an entirely separate category. Of the five billion-dollar components of the sports apparel industry in 2006, casual wear was the only growth segment. Nike has entered the segment with Cole Haan, but does not have a commanding market share. There is substantial room for growth in this segment.
Overseas growth represents another significant market opportunity. Nike has an established presence in 160 nations worldwide and sales office in over 50. Other than Canada, international markets are in various stages of growth from nascence to rapid growth. Due to Nike's established presence overseas, these markets represent a significant long-term growth opportunity. Nike can leverage the celebrity power of its internationally recognized stars to promote the growth…[continue]
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