Nike business model and corporate strategy

Nike was founded in 1964 as Blue Ribbon Sports, and became Nike in 1971, by Bill Bowerman and Phil Knight, the latter going on to become the company’s long-serving CEO (O’Reilly, 2014). Today, Nike describes its business in the 2018 10-K as “the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services” (p.55). In addition to the eponymous brand, Nike markets Converse, Hurley, and entire Jordan brand, and others. Nike’s revenues in 2018 were $36.397 billion, up nearly 6% from the year previous. Net income was $1.933 but this was down significantly from the prior year, as the company recorded a much higher income tax expense.
Nike competes in the sports apparel industry, which is estimated to be worth around $184.6 billion worldwide, meaning that Nike holds about a 19.7% share. The industry is mature but still growing, with a CAGR of 4.3% over the past five years. Nike’s major competitors are all large companies as sophisticated as Nike is, including Adidas, Puma, Fila, but also Umbro, Ralph Lauren and lululemon (Bisht, 2015).
Companies that have not succeeded in this industry are mainly ones that were unable to scale, but also firms like Reebok that are relatively successful but found themselves to be acquisition targets. There are several critical success factors in the industry, including trend-setting design, excellent supply chain and distribution management and marketing expertise. Consumers are typically drawn by design and marketing, while the back end ensures that products are made, make it to market, and costs are contained.
The political/legal forces in the industry are minimal, but there is some impact of laws regarding environmental pollution and treatment of workers. These laws typically affect the third party suppliers to Nike, but that has a knock-on impact on the company itself. Taxation is the other major area that affects Nike, as last year’s net income indicates.
This industry is in a state of monopolistic competition. There is some differentiation on product, but not as much as the marketing of each company projects. Each firm uses marketing – especially brand associations – as a cornerstone of differentiation, and Nike has been a leader in this regard. The overall health of the economy impacts the industry as much of the purchasing in this industry is discretionary, both in terms of how much athletic apparel is purchased and also what brands. During tougher economic times, consumers might move away from premium brands like Nike, as was seen in 2017 when the high end sneaker market was struggling (Salzman, 2017).
Successful firms in this industry master social forces. In general, the apparel and footwear businesses are driven by style trends, and these can fluctuate. The slump in the US for Nike in 2017 – the company’s global revenues grew that year – was driven by shifting trends. Furthermore, athletic apparel is driven by the popularity of particular sports, players, and by how much people in a given society are exercising. Nike performs better in fitter markets. Technological forces also can have a noticeable impact on the business, in terms of apparel design, high end fabrics, and of course in marketing and supply chain management.
The firm-level strategy for Nike is to be a differentiated player. It has staked out premium positioning in its industry, and supports this in both its marketing and its products. By competing in both athletic apparel and footwear, and adding some equipment, Nike is able to market similar products to the same consumer base, through the same channels. Nike often utilizes third party retailers as a key part of its strategy, one that allows it to focus on design, development and marketing, its three core strengths.
Nike has a fairly strong financial position. It is consistently profitable, and has enough pricing power to ensure this. According to the financial statements contained in the most recent 10K, Nike is solvent and liquid, and has been steadily increasing its earnings per share. It has a low level of long-term debt. However, its asset size declined last year, and this contributed to a decline in the book value of its equity. Thus, while generally in strong financial shape, Nike does have some blips on its performance that at the very least warrant further observation.
Nike has strengths in design, marketing and development, and it can also rely on its retail partnerships, and its brand, which was ranked as the 17th most valuable in the world by Interbrand (2018), gaining 10% in value in the past year. Recent performance indicates some weaknesses in terms of a historic strength in design – or perhaps it is more of a marketing issue – leading to a decline in US sales. Nike’s recent financial performance has also seen a decline in equity value, which is not encouraging. There might not be that much further organic growth for the company.
Yet, there are likely still opportunities for Nike. Large-scale growth can still be accomplished via acquisition. Nike also has the opportunity to increase revenues by entering new product markets, or by reviving product markets where it has struggled recently. There are a lot of those sorts of opportunities for incremental growth. Nike is under threat from trends in the social environment that might turn against it, including issues surrounding workers at the company’s suppliers, an issue for Nike in the past. Nike also faces threat from economic slowdown, should that occur, and from competition, as apparently Adidas is starting to close ground on Nike.
For Nike, a major acquisition would be costly, and there are only so many options available. Geographic expansion will only be incremental as Nike has good global coverage. It may need to simply opt to grind away for growth, targeting multiple products, bringing in new sponsorship deals, and just hammering away at growth the old fashioned way. While the company’s rise was accompanied by some stratospheric home runs along the way, the reality is that day-to-day growth is the pathway to building the skill sets that sustain success. The others options carry with them some stronger growth potential, but at high risk.
It is recommended that Nike should pursue slower, incremental growth. It is the market leader in a saturated business. If it looks for massive wins, it probably will not find any. That does not mean it shouldn’t try, of course, but Nike should also focus its energies on the ground game – the day-to-day victories that build each product, each brand and each market gradually through hard work. This type of growth can be slow, but it builds the skills throughout the organization that are required to succeed over the long run. This is certainly not the most compelling recommendation, but it is one that works in the business environment Nike is presently facing.




References

Bisht, P. (2015) Sports apparel industry overview. Allied Market Research. Retrieved April 22, 2019 from https://www.alliedmarketresearch.com/sports-apparel-market

Interbrand (2018) Best global brands 2018 rankings. Interbrand. Retrieved April 22, 2019 from https://www.interbrand.com/best-brands/best-global-brands/2018/ranking/

Nike, Inc. 2018 Form 10-K. Retrieved April 22, 2019 from https://s1.q4cdn.com/806093406/files/doc_financials/2018/ar/docs/nike-2018-form-10K.pdf

O’Reilly, L. (2014) 11 things hardly anyone knows about Nike. Business Insider. Retrieved April 22, 2019 from https://www.businessinsider.com/history-of-nike-facts-about-its-50th-anniversary-2014-11

Salzman, A. (2017) Nike and Under Armour slammed by sneaker recession. Barron’s. Retrieved April 22, 2019 from https://www.barrons.com/articles/nike-and-under-armour-slammed-by-sneaker-recession-1503070041