Nike Strategic Analysis Nike\'s Strategic

Nike Strategic Analysis

Nike's strategic direction when analyzed using the Ansoff Matrix and the Boston Consulting Groups' Growth/Share matrix strategic market planning frameworks illustrate the company's increasing reliance on branding, marketing, in-channel synchronization and execution, in addition to a stabilizing of their supply chains. It is the intent of this paper to analyze the implications for Nike's strategy based on the use of these two strategic planning concepts.

Ansoff Matrix as a Strategic Planning Tool

The Ansoff matrix is comprised for four quadrants, defining specific strategies for addressing opportunities in current and new markets, relying on current or new products as the basis of these market-based strategies. Figure 1 provides a graphical representation of the Ansoff matrix.

Figure 1: The Ansoff Matrix

Each of the quadrants included in the matrix are defined as follows:

Market penetration strategy - the strategies in this quadrant collectively defines a series market strategies based on the company's existing products where no product modifications are made. In the case of Nike, this quadrant represents their heavy investments in branding to maintain a high level of unaided awareness and product loyalty in their existing customer base, the continual fine-tuning of their supply chain which has in the past impacted their ability to fulfill customer demand globally, and the continued retail-driven sales strategy which includes financial and product incentives to maintain shelf-space in all major retailers. A market penetration strategy specifically focuses on retaining existing customers and making them more brand-loyal.

Market Development strategy - a strategy that requires companies to change their existing product lines to better align with the needs of new markets. Often companies will find unmet needs in related market segments, and expand their product strategies, re-define their pricing and promotional strategies, and seek to reach the new segment with slight modifications to their existing selling and distribution strategies. Nike has successfully used this strategy to move into the Golf segment for example. Another successful strategy that Nike has used in this quadrant is the NikeID program, where customers can create their own customized shoes directly on the Nike.com website. The integration of a build-to-order strategy in the shoe and apparel industry is one of the most complex mass customization strategies there are, and Nike is successful at this selling strategy mainly due to the lessons learned from their previous failures in the supply chain planning function. Those failures and the lessons learned, set the foundation for launching and sustaining the NikeID shoe customization program.

Product Development Strategy - as the name suggests this is a strategy that seeks to gain additional customers in the current markets served by developing subsequent generations of products. In the case of Nike and their core competency of the new product development and product launch processes, this quadrant has been one of the most active in the shoe and apparel manufacturers' strategies globally.

Product development strategies and their associated processes have emerged in several industries as the most compelling competitive differentiator between market makers and the many competitors populating larger market segments. Consider the cellular telephone and services industry, and the processes of new product development and product introductions including the pace of new services and telephones, and this point becomes clear. The greatest weakness that many companies need to overcome is scope creep as defined by Wheelwright and Clark. These researchers have found that complacent cultures within organizations foster a willingness to continually add in features, many of which are not anchored in unmet customer needs or research. The Ansoff matrix also fails to capture this dimension of many organizations as it relates to their complacency and therefore a willingness to let scope creep, or the addition of unneeded feature, begin to permeate development efforts.

For Nike, the ability to streamline the many new product development and product launch processes has often made the difference in their ability to maintain competitive leadership in key markets and retain dominance in key distribution channels.

Diversification Strategy - Ansoff defines this strategy as one where an organization creates entirely new products for a new, and often unknown customer bases. By far the riskiest strategy for an organization to undertake, diversification ultimately requires an organization to turn away resources from a known market to pursue an unknown one. This point is made clear given the lack of resources many organizations have today for their existing strategies, making diversification even the more risky when it ties up resources that could be used in known product and market strategies. Globalization however is forcing the issue of diversification into many organizations who must expand into foreign markets to stay on a competitive parity basis with both regional and global competitors. Minimizing the risk of global expansion through the use of Joint Ventures (JV), mergers and acquisitions (M&a), and business models that share the risks of entering new markets across two or more participating companies are increasingly commonplace. Ansoffs' matrix has been further analyzed by many theorists who have noted that the model, in its present state, does not allow for related vs. unrelated diversification strategy definition.

In the case of Nike, a related diversification strategy is the successful launch of women's athletic shows and apparel. Nike has been the only athletic footwear and apparel manufacturer to as go so far as to create an entirely separate marketing, sales, distribution and service strategy specifically for this market. Their approach to defining the NikeWomen store chain, definition of and execution of women-only websites and the development of fitness dance shoes and apparel shows how Nike has been able to take the new product development and product introduction processes honed to a high level of performance in core markets, and move them into entirely new segments. Nike is showing competitive strength in the ability to move into related segments, and relying on an expertise in core market sensing, market research, product development, product introduction, and channel strategies, quickly establish themselves as a viable competitor in the markets targeted.

Illustrating Nike's approach to a related diversification strategy is shown in the following table as created from a series of analyses of the company's filings with the Securities and Exchange Commission, in addition to an analysis of their Annual Reports. Figure 2 clearly shows a pattern of initially experimenting with mainstream clothing with the acquisition of Cole Haan, then moving quickly back into footwear, clothing and apparel that supports a more sports-oriented and driven marketing strategy. Figure 2, a sample history of Nike's acquisition strategy, is shown here:

Figure 2:

Patterns in the Nike Acquisition Strategies Show Related Diversification Focus

Analyzing Nike Makes Ansoff Matrix Limitations Clear

There are many limitations of the Ansoff matrix as they relate to Nike's current and future strategies. Of all the limitations however the foremost one is the lack of a clear definition of any company's core competitive strength. Juxtapose the Ansoff Matrix for example vs. The Determinants of Competitive Advantage as defined Dr. Micheal Porter as the human and intellectual productivity of a nation in the context of its comparative advantage. The Ansoff Matrix makes no mention of how competitive dynamics of a multinational corporation ultimately impact each nation the company chooses to participate, produce, compete and sell in. Porter's Five Forces Model has been widely criticized for the same shortcoming specifically with the example of how General Electric, upon entering a new nation or region, will drive up its global competitiveness by its ability to execute at a far higher level of effiency than local and regional competitors. The ability to codify processes and make them more applicable across broad geographic market opportunities and perfect the resulting launch processes necessary to successfully penetrate a market is what makes General Electric a global competitor. Yet in the end, General Electrics' ability to quickly penetrate and be successful in new geographic markets does not necessarily make the United States inherently more competitive; it in fact makes the local region more conversant in global business competitive strategies. In fact Porter has often been criticized for looking too much at high velocity, high change industries including high technology, apparel and retailing as the dynamics of these industries tend to support the Porter models' definition of competitiveness. In analyzing the limitations of the Ansoff Matrix as they relate to Nike, these lessons learned from an abbreviated critique of Dr. Micheal Porters' competitive models underscore the many limitations of the Ansoff Matrix as it relates to industries which have high inventory, selling, and new product development velocities or speeds of change. Here are the major limitations of the Ansoff Matrix as it relates specifically to a strategic assessment of Nike:

Lack of visibility regarding competitive dynamics - There is no method for defining the strength and direction of competitors in current or planned markets, and there is no indication of the relative attractiveness of markets or not based on this dynamic. The Ansoff Matrix is blind to this market dynamic completely.

Profitability by product area and potential for growth - Another major limitation of the Ansoff Matrix, there is no analytical structure to denote processes for prioritizing the strategies themselves. For any strategic planning activity to be effective there must be the ability to quickly define process-level changes to increase competitive advantage. Mintzberg's critique of the strategic planning process is illustrated in the shortcomings of the Ashoff Matrix in this regard.

Lack of strategic prioritization of projects within the context of the Ansoff Matrix - the Ansoff Matrix does not provide for strategic criteria to be applied to specific projects. The portfolio management approach to strategic planning specifically has been developed to respond to the shortcomings of the Ansoff Matrix and other analytical constructs like it. Portfolio management is in fact the basis for Boston Consulting Groups' Growth/Share Matrix, or as it is commonly referred to, the BCG Matrix.

Lack of quantification of cash generation and modeling of future financial performance - the shortcomings of the Ansoff Matrix as a strategic tool relative to the needs of strategists, specifically at Nike, on this point relegate the Matrix to introductory discussions only in the context of strategic planning. Strategic planning is increasingly focused on the financial implications of the myriad of decisions involving investing in an existing dominant strategy, choosing to penetrate new markets, or defining a diversification strategy. It would be unimaginable for Nike for example to choose a fairly aggressive M&a strategy without highly accurate and precise financial data. From the introduction of the Profit Impact from Market Strategy database which is called PIMS, this series of databases that form a best practices methodology of defining the financial implications of marketing strategies has often been used by strategic planning departments in conjunction with the BCG Matrix to further financially test and validate strategic plans prior to their implementation, including the impact of pro forma market share estimates on profitability. For Nike, their many strategies require this level of financial analysis and insight before making significant investments. The depth of insights and best practices benchmarking possible with the PIMS database and methodologies further show the inapplicability of the Ashoff Matrix for planning at Nike.

Applying the BCG Growth/Share Matrix to Nike

The BCG Matrix is primarily focused on the resource allocation decisions companies need to make between competing products and strategies. For Nike, this specific strategic planning tool is perfectly suited for use across multiple levels and business units and the need to integrate into strategic plans their emerging process-centric competitive strengths in product development and new product introductions. The Boston Consulting Group specifically calls the ability of organizations to learn and embed processes into their organizations the experience effect. The ability of Nike to navigate their products through strategic realignments depends heavily on their ability to capitalize on this cornerstone aspect of the BCG Matrix. Nike must seek out those processes that will deliver the highest level of experience effect performance, in order to both attain lasting competitive differentiation in the markets they compete in first and second, to gain market share and further drive down costs.

While the BCG Matrix has achieved notoriety for its graphical definition of business unit positions relative to market growth and market share, the more valuable insights are actually in the quantifying of the experience effect dropping costs as a result of greater market share being attained. For Nike, this is essential for their business model to succeed. The experience effect is what delivers Return on Investment (ROI) within the boundaries of the BCG Matrix. In addition, the true role of the BCG Matrix is to define cash flow and investment strategies based on emerging growth opportunities (Stars) and fuel the development of entirely new strategies from cash generating products (Cash Cows). Saunders states that conventional wisdom regarding the BCG Matrix focuses on milking the cash cows, investing in star or high-achieving products, divesting and getting rid of dog products. The problem children products are either divested or invested in to turn them into stars. This interrelationship and inter-reliance of products on each other further distinguishes the BCG Matrix as a portfolio planning strategy. Figure 3 shows a simplistic representation of the BCG Matrix. Figure 4 shows the representation of the BCG Matrix by Henderson of BCG.

Figure 3:

Representations of the BCG Matrix

In applying the BCG Matrix specifically to Nike yields the following representation of the company's products and analysis of their core businesses.

Nike's BCG Matrix

Star Products

Question Marks

Cash Cows

Dogs

Analysis of Nike Brands and Product Areas:

Nike manufactures products in three main categories: footwear, apparel, and equipment. Nike accounts for its Converse, Cole Haan, Hurley, Nike Golf, Nike Bauer Hockey, and Starter businesses in what the company calls it's Other category. What was not immediately obvious from using the Ashoff Matrix to analyze these businesses that comprise the other category was their high growth, expanding market share, and increasingly high levels of cash generation. The company also it brands for swimwear, cycling apparel, children's clothing, school supplies and eyewear.

Footwear Analysis

Nike branded footwear is the largest component of overall Nike sales and in the vernacular of the BCG Matrix, a cash cow. However, this business is becoming a smaller portion of the company's portfolio as growth has slowed and the company aggressively launches into China. As this core portion of their business is aging quickly, it is feasible that the "Other" category of emerging businesses will be the majority of revenue within the next three years. Nike purchased Converse, a lifestyle and performance brand sold at a moderate price point, in June 2003. During the following year, Nike acquired Official Starter Properties LLC and Official Starter LLC, which are performance and lifestyle apparel and footwear value brands, respectively. The main benefit of adding these businesses was the reduction of Nike's dependence on its core brand and expanding the breadth of its product portfolio. Also, both Converse and Starter allowed Nike to enter into new price points and other retail channels without hurting the Nike brand. Both brands compete in a lower price tiers than the Nike core brand. Before the acquisitions Nike did not compete in a price tier below $49 per unit. Converse is both a performance and a lifestyle brand. Although it overlaps with some of Nike's existing business, Converse boasts a deeper portfolio of lifestyle brands and is moderately priced. Nike is also leveraging its technology, design expertise and scale to fuel further growth behind the Converse brands. It is clear that Converse could expand beyond footwear and into apparel and accessories. Additionally, Nike could introduce Converse to other retail channels. Starter fulfills the role of a value brand and sells in the mass merchandise channel (Wal- Mart), a retail channel in which the Nike brand was not participating before the acquisition. Currently, Nike is selling sneakers in 400 Wal-Mart stores throughout the U.S.