Nike Inc. Operations Evaluation of Nike Incorporated

Nike Inc.

Operations Evaluation of Nike Incorporated

Marketing Mix Price

Marketing Mix Place

Market Situation

Factories Based on Region and Product

Current Situation of Footwear Industry

Marketing Mix Product

Nike Current Situation

Strengths

Marketing Mix Promotion

Weaknesses

Opportunities

Threats

Critical Evaluations

PEST Analysis

Growth Opportunities

Political Evaluation

Economic Evaluation

Social Evaluation

Technological Evaluation

Changes in Operations Workers at Factories

Code of Conduct Grade Assessment

Operations Evaluation of Nike Incorporated

Understanding how globalization affects a company will be analyzed to explore how Nike Incorporated handles the multiple risks and capitalizes on the benefits of such expansion. As Nike has faced immense growth and criticism due to the complex business model that has led to the number one position in the athletic footwear industry. It has been a challenge to balance strong organizational performance along with required corporate ethical standards expected for a global leader. A critical evaluation of Nike Inc. will be completed using marketing theories as a guide such as PEST, Marketing Mix, and SWOT analysis. Whereby an understanding of how the company strategy in operations has led the company from its current situation to recommendations for a better future position.

Introduction

Phil Knight along with his partner Bill Bowerman started Nike in 1964. They invested $1,000 in the company Blue Ribbon Sport as import distributors of athletic footwear. The first suppliers sources were premium quality athletic shoes from Japan. Today Nike is a household word throughout the world as an industry leader in marketing, design, and distribution in athletic footwear and sportswear (Nikebiz. com 2011).

Marketing Mix - Price

The business model has not changed much since its inception as the company does not generally manufacture athletic shoes. They mainly have other countries manufacture them at a low price point where labor and raw materials are less costly, and resell them after branding them at a markup price for a profit. Nike mainly expands their business by investments in research and design development, along with marketing plus sales to attract more manufacturers. These new suppliers in turn compete to build Nike product designs. The idea to import from great quality producers like Japan came to Knight when in college at Stanford (Nikebiz. com 2011). The plan was to buy lower cost yet finest quality footwear from country's like Japan, then resell in the U.S. And other high demand areas such as Europe and Australia at a premium price.

Marketing Mix - Place

While other athletic footwear companies like Adidas who were once the market leader continued to design and manufacture their own shoes in the U.S., Germany, and other places where the cost of production was high, Knight recognized the advantage of outsourcing manufacturing shoes in lower cost countries (Nikebiz. com 2011). As Blue Ribbon Sports started to reach millions of dollars in sales by the 1970s, they tried expanding into designing their own shoes. The new name of Nike came into existence in 1978 as the company started selling under their own brand.

The Nike brand was launched in 1972, and the company officially changed its name to Nike, Inc. In 1978 (Nikebiz.com 2011). There were mainly a couple of manufacturers in Japan that were the suppliers of shoes to Nike. They were Nippon Rubber and the other was Nihon Koyo, they continued to be successful in business together throughout the 1970s. However, eventually costs begin to grow due to the International crisis that affected oil prices and raised the value of the Japanese Yen in relation to the U.S. dollar (Nikebiz.com 2011). At this point it became clear to Nike that a new supplier was needed that could provide the highest quality product at lower costs. Nike decided to try manufacturing and opened a plant in the U.S. To gain more control over their product. They also pursued new foreign suppliers in Korea, China, Taiwan, and other countries where labor and other resources were still at lower prices (Nikebiz. com 2011). The U.S. plant could not compete with the foreign producers so by 1980, Nike abandoned domestic manufacturing. Opting instead to continue with the original business model of outsourcing manufacturing (Nikebiz.com 2011).

Market Situation

With both Korea and Taiwan as the chief producers of Nike products, costs once again increased to the point that Return on Investment was not as profitable as necessary to meet the costs of production. Nike begin to work with these manufacturers in a bold new initiative to promote them to move their manufacturing plants outside their own country to other less costly nations around the world in order to benefit from low cost labor and resources, see Table 1 (Nikebiz. com 2011). Other plants were eventually opened by Nike foreign manufacturers as plants were built in countries in Southeast Asia. Nike contracted with those manufacturers willing to move to sell high volumes of product and also to help supply marginal managerial support in running the plants.

Table 1: Factories Based on Region and Product (Nikebiz 2011).

Current Situation of the Footwear Industry

Marketing Mix - Product

While the athletic shoe market has grown tremendously over the past twenty years, there are only a few companies that are supplying footwear products. Some of the statistics associated with the number of athletic shoes sold are over $5 billion in sales in the late 1980s to today where there are over $15 billion purchased each year. The number of shoes that have been bought by consumers in the U.S. is a staggering 340 million pairs in 2001 (Locke 2010). The dominating companies are Nike, along with Reebok and Adidas who have held the top positions for over a decade.

Nike Current Situation

At present the number of Nike goods produced span over 700 different factories in over 50 countries (Locke 2010). The total number of workers outside Nike domestic holdings is more than 52,000. Internally Nike has nearly 23,000 employees. Nike has only 22,658 direct employees. There are many different types of shoes that are produced. Over 1,200 varieties of footwear are now offered. The type of products not only include footwear but sports apparel and even equipment. Expansion has increased to markets in Latin America, Europe, Australia, and in Asia as well (Locke 2010). The amount of revenue generated has now exceeded $20 billion.

SWOT Analysis

Strengths

Marketing Mix - Promotion

Nike takes its competition seriously and has became very skillful at promoting its products through athletic events around the world. They have learned to hone in on the athletes that can give them the most advertising clout by sponsoring the athlete in return for marketing coverage and the opportunity to put their name on Nike products.

The company has no production costs or expense related to factory maintenance, resource costs, raw materials, or heavy equipment costs. There are no factories owned by Nike. Revenue is not bound up in real estate, equipment or labor.

Nike has a lean organizational structure that is primarily focused on research and development. This allows the management team to focus 100% on how to grow the business vs. The day-to-day duties of a manufacturer. Leading to cutting edge innovations that consumers demand.

Manufacturing is fluid for Nike as they hire the factories that can give the best quality at the lowest price. Production is flexible able to shift to the best value for the highest quality.

Brand name known around the world. Nike has a strong brand image that is instantly recognizable.

Weaknesses

Though Nike has expanded into other product offerings. Its primary source of revenue is in footwear. If the market trend toward footwear ever dries up, so will the majority of Nike revenues.

A similar problem exists in the sales channel. Nike primarily sales through retailers. There is only one Nike retailer namely, Nike Town (Locke 2010). Yet most of the income is filtered through third party retailers. If there is a turn in their willingness to promote Nike products there are plenty of competitors offering similar products.

Use of foreign manufacturers has caused problems since Nike does not govern labor practices. They have been accused of supporting slave labor, mistreating workers in low income countries, child labor infractions, and unfavorable working conditions.

Opportunities

Though Nike sees itself as an Athletic Footwear provider. It is still considered a Fashion Brand as well. Many of its customers buy for fashion not athletic performance. Because of this there are fads where shoes are only popular for a season. This creates opportunities in offering different selections for different trends or seasons. Thereby one customer may purchase more product (Locke 2010).

Expansion of the market into sportswear accessories for additional revenue beyond sportswear and footwear such as sunscreen, beach wear, sunglasses, waterproof sport watches and so on.

Further international development in sponsoring sporting events worldwide such as Championships, Race cars, soccer, and the Olympics (Locke 2010).

Expansion into more countries retail chains such as India where there are now many consumers that have reached a higher income level.

Recognition and redemption by leading the industry in fairer labor laws for developing countries.

Threats

Situation with labor laws in developing countries where Nike has contracts with manufacturers has caused major problems with media painting the organization as supporters of unfair labor practices in recent years.

Stigma that has caused political, social, economic, issues including lawsuits and even boycotting of Nike products in the U.S. And abroad. Threatening the survival of the Brand from such attacks against its stability and reputation.

Economic conditions shown by a PEST analysis points to Nike having to monitor its currencies very carefully to track the fluctuations in prices due to instability.

Due to economic downturn over the past few years, many former customers are choosing lower cost footwear rather than the Nike brand.

Conclusions

The conclusions drawn from the SWOT analysis on the strengths and opportunities side show that Nike is very adept at promoting and marketing their products, using the top athletes. This marketing strategy has worked well in selling athletic footwear with famous athletes sponsoring the product. Some of the athletes that have sponsored Nike include Bo Jackson, Michael Jordan, John McEnroe, and Jerry Rice, Tiger Woods, and Alberto Salazar to name a few (Nikebiz. com 2011). Over $20 billion annually has been earned through advertising and athletic sportswear and shoes carrying the names of these top athletes.

There are many more competitors entering the market from the very manufacturing locations where Nike also has an investment. Though the business model of buy low, sell high has worked in the past, due to so many new competitors and developing countries entering the market, this is no longer necessarily the model that will carry Nike into the future. Many competitors are manufacturing their own high quality, low cost alternatives to compete with Nike and other footwear industry leaders. This is beginning to chip away Nike's market share.

On the other hand internal weaknesses and external threats revolve around the fact that Nike needs to improve its oversight of manufacturers and suppliers that have been contracted to provide products. Their hands off approach has cost them dearly in terms of credibility and ethical standing in the western world. This is due to several complaints by NGO organizations and reports from the media. The backlash has branded Nike as a company that turns a blind eye to child labor, underpaid laborers working in hazardous and unsanitary conditions. While managers that refuse to accept responsib1ility for deplorable factory conditions. Meanwhile the competitors in developing countries stand ready with comparable quality products to step in to overtake Nike's share of the market.

Critical Evaluation

PEST Analysis (NetMba. com 2011).

Growth Opportunities

Evaluation of Political Factors

A movement organized against Nike relating to the problems with thousands of workers facing unsanitary and poor working arrangements led to NGOs organizing against the footwear giant. Nike was under serious attack for intentionally exploiting developing countries and plagued with accusations against their operations that allowed human right issues such as child labor and extended hours without pay (Harvard Business Case 2010). The issues of Child labor surfaced first in Pakistan and Cambodia which alone caused millions of dollars in lost revenues due to boycotts by former customers in the U.S., Europe and other nations around the globe. The company faced serious accusations next in operating their companies under deplorable working conditions as many were forced to work for months without pay or days without time off in countries such as Vietnam and China. Add to this those who were paid under the legal minimum wage in Indonesia, and you have an Anti-Nike Movement (Harvard Business Case 2010). The founder of Nike Phil Knight, felt his company was under attack and the political fallout caused him to say in 1998 at a Press meeting that ""the Nike product has become synonymous with slave wages, forced overtime, and arbitrary abuse.

In analyzing the political fallout of such allegations, it is amazing how the company can one moment be affiliated with excellence in athletic achievement by the best sports athletes in the world. Now considered in the undesirable position of representing inhuman civil rights for children and underpaying the poorest workers who struggle to feed their families under "Nike's" alleged employment. The problems associated with global expansion are shown here to be risky at worst due to the multiple relationships with suppliers, manufacturers and workers who are not within the same political legal obligations as the parent company (Harvard Business Case 2010).

Economic Evaluation

There are several operational variations that are present in the Nike business segments that reflect economically on its productivity. The company is considered in the athletic footwear category however the majority of its suppliers produce sportswear and other goods, only 740 of the 6,800 contractors actually design shoes. With the most concentration of manufacturers of shoes in China (Harvard Business Case 2010).

In evaluating the remaining Nike sportswear contracts are with 580 plants around the world. The footwear industry is much easier to control due to the long-term commitment between Nike and its contractees. This is because a footwear factory requires a long-term commitment by the manufacturer in investments in plant equipment and setting up suppliers for raw materials in addition to government regulations. It is more overhead intensive.

Technological

A classic case of how the technological advances of today has helped Nike in its ability to produce footwear Just in Time to meet consumer demand is through long-term contracts with both Korea and Taiwan manufacturers. They are able to control inventories through technological tools on the plant floor such as satellite as designs are created and beamed directly to multiple plants at the same time of newly sketched designs. The designers can then collaborate from various locations simultaneously around the world to get the raw materials, achieve the final design, and build the product. Next relaying full color catalogs of information including specifications and production schedules by internet portals or online catalogs to various retailers for ordering.

Economical Repercussions due to Marketing Mix

Versus the sportswear or apparel industry that is relatively easier to set up with a basic garment shop, less expensive equipment and a higher concentration in laborers. However there is less control and cooperation in addition to less governmental oversight and less investment by the contractee. With the apparel industry there may be more than one company being supplied by the same plant alongside Nike, as well, possibly competitors of Nike. In analyzing why there are so many problems with the apparel side of the industry for Nike this is apparent due to less government, less cooperation by the factory contractee, and company (Nike) managerial control. This type of differences in product development has a major influence over the production results including revenues. This creates a great area of risk that Nike must learn to manage these volatile conditions that can spell disaster due to these multiple tier supplier relationships in the apparel industry. Not to mention the trends in apparel change frequently compared to footwear. So once the product is produced it is imperative that it get to market right away while demand is hot and retailers are ordering the apparel merchandise. If the retailers decide to cancel an order due to low demand, it may be too late for Nike to notify contractees and the result is loss revenues in millions or dollars (Harvard Business Case 2010). Therefore this need for fast product to market creates problems with labor and wages (as mentioned with child labor, low wages, and poor working climate) that has caused Nike to lose face in the eye of consumers.

Evaluation of Social Factors

Nike had contracts to several Indonesian manufacturers that hired over 20,000 workers. As mentioned earlier Nike had talked many of its Korean Manufacturers to move to other countries to save production costs. Four of these Korean factories had moved to Indonesia. Since Nike had backed the Korean manufacturers they came under scrutiny for the way the factories treated workers and how they were managed. There were many organizations that were reporting information about how these plants were run. They are called Non-Government Organizations or NGOs. Basically consumer or employee relation activists representing civil and human rights. The number of shoes designed by the factories in Indonesia are over six million and the NGOs were reporting that the workers were exploited and earning very minimal wages along with very inhuman working conditions. They reported that many workers earned less than $1 U.S. dollar a day (Harvard Business Case 2010). These NGO organizations contacted the local governments to demand better wages and working conditions. At the time Nike asked the governments for an exemption from the minimum wage requirement to ensure production would continue. Many Indonesian workers felt threatened on the job by the supervisors they worked for. The Korean managers were known to be very unfair when it came to wages. As these Labor groups uncovered this information through many years of undercover investigation, the facts were reported on television by CBS Special Report that targeted Nike as the company behind such treatment of workers (Harvard Business Case 2010). This cause major problems with Nike's credibility. These reports were then posted in the print media newspapers and magazines such as The New York Times, Rolling Stone, and The Economist (Harvard Business Case 2010). Nike management refused to accept the blame stating that the factories were run by Korean owners.