Nike\'s Strategic and Financial Position Analysis

Nike's Strategic And Financial Position Analysis

Nike is a globally recognized multinational corporation founded by the Stanford Graduate School of Business graduate, Phil Knight, and Bill Bowerman who was the track and field coach at the University of Oregon. The two appear to be a natural fit as each hailed from a background that would appreciate the underlying design that goes into creating a quality running shoe.

Nike's global operations in aggregate employ a number greater than 30,000 employees throughout a range of services and job functions. A fraction of that aggregate is employed at the company headquarters in Beaverton, Oregon. According to www.nikebiz.com, "Nike employes more than 36,000 people globally. Our Nike World Headquarters located in Beaverton, Oregon is home to more than 7,000 employees. For the fiscal year ending May 31, 2010, we reported revenues of $19.0 billion." (www.nikebiz.com/company_overview/facts.html)

The Nike Mission Statement

"To bring inspiration and innovation to ever athlete in the world. If you have a body, you are an athlete." -- Bill Bowerman

According to www.nikebiz.com, "Bill Bowerman was a nationally respected track and field coach at the University of Oregon, who was constantly seeking ways to give his athletes a competitive advantage. He experimented with different track surfaces, re-hydration drinks and most importantly -- innovations in running shoes. But the established footwear manufacturers of the 1950s ignored the ideas he tried to offer them, so Bowerman began cobbling shoes for his runners." (www.nikebiz.com/company_overview/history/1950s.html)

The mission statement is clearly reflective of Bowerman's past as a track & field coach. This innate ability to see the athlete in all humans is what came naturally to Bowerman. To see an ability where others would consider no ability exists, or perhaps not as much as what Bowerman sees. Tiger Woods is an example of the talent Bowerman saw in an unproven individual prior to Tiger's opportunity to 'wow' the world in his first Masters Tournament.

Additionally, according to www.nikebiz.com, "Phil Knight was a talented middle-distance runner from Portland, who enrolled at Oregon in the fall of 1955 and competed for Bowerman's track program. Upon graduating from Oregon, Knight earned his MBA in finance from Stanford University, where he wrote a paper that proposed quality running shoes could be manufactured in Japan that would compete with more established German brands." (www.nikebiz.com/company_overview/history/1950s.html)

In accordance to the mission statement, the background of Knight and Bowerman would be critical to the emergence and subsequent dominance of the Nike brand in the running shoe industry. The sneaker design set Nike apart early on to the point where a brilliant marketing scheme would catapult the brand beyond the popular Converse and Puma brands.

The strategy of Nike ostensibly may be summed up on one word, innovation. Nike's inherent success is attributable to its ability to innovate at every corner to create a strategic advantage between its operations and that of the competition. Although some of its innovative ideas and advertising promotions did not work to the successes of previous ideas, the Nike strategy remained geared toward innovation.

According to www.nikebiz.com, "Innovation is at the heart of NIKE, Inc.'s business growth strategy. Our relentless focus to be better helps us create the world's most innovative products for consumers across the globe. This same philosophy and determination is driving change in how we approach corporate responsibility in today's marketplace. Years ago, when we started working to improve the labor, environmental and social impacts of our business model, we were largely driven by a need to manage risk. Today, our corporate responsibility approach has evolved from focusing on risk management, philanthropy and compliance to one that utilizes our natural focus on innovation to transition NIKE, Inc. into a business that is more sustainable, by which we mean that it brings people, planet and profits into balance for lasting success." (www.nikebiz.com/crreport/content/strategy/2-1-1-corporate-responsibility-strategy-overview.php?cat=cr-strategy)

Additionally, according to www.nikebiz.com, "To fulfill these demands, we must succeed in a world where natural and human resources are constrained. In the future, issues ranging from peaking oil prices, climate change mitigation and population growth to the decreasing availability of natural resources could impact our consumers and our business. As the world moves to a low-carbon economy, we see potential impact to labor forces, working conditions, communities, development, youth, sport, supply chains, products and more." (www.nikebiz.com/crreport/content/strategy/2-1-1corporate-responsibility-strategy-overview.php?cat=cr-strategy)

Nike has "defined three core strategic questions." (www.nikebiz.com/crreport/content/strategy/2-1-2-changing-world-urgent-challenges.php?cat=cr-strategy These three questions are provided below.

1.) What new business concepts could enable NIKE, Inc. To thrive in a sustainable economy?

2.) How do we create a road map for evolving to a future state and solve the challenges preventing us from getting there?

3.) How do we continue to evolve and improve our current model during the transition?

Ideas such as clean running and efficiently operating factories that harness renewable energy resources to generate power not only for their facility, but for the surrounding community perhaps provides the most 'bang for the buck' in terms of investment and the creation of Goodwill.

According to Sroufe, Liebowitz & Sivasubramaniam (2010), "One of the biggest blunders in leading change toward sustainability is the failure to institutionalize sustainability within the firm (Doppelt, 2003). If the internal policies and practices are inconsistent with the needed sustainability culture, "the risks are high that old thinking and behavioral patterns will eventually rise up and overwhelm efforts to adopt more environmentally and socially responsible paths" (Doppelt, 2003, p. 36). We recommend an active and early role for HR to help create the systems and processes (for example, selection, training and reward systems) to reinforce the wide range off sustainability initiatives and institutionalize the change." (Sroufe, Liebowitz, Sivasurbamaniam, 2010)

A road map for the organization to facilitate a future state for the organization is inherently challenged by its access to resources and to human capital that can propel the organization forward to achieve its goals. Nike seeks to establish a rather ubiquitous goal of inspiring and innovation to every 'athlete' around the world. Therefore, the idea is that every human on the planet must have a pair of Nikes.

During the transition to this future state of enabling the future athlete by providing free or low cost sneakers to populations that would normally not be able to afford a pair of the relatively expensive sneaker, Nike is likely to increase R&D expenditure relative to the new markets to which further sustainability and market engagement is occurring. The evolution and improvement of the current business model is a function of the inputs received from the external environment to the organization.

Nike's strategy and impact in future affairs is an indirect function of the company history as written by Knight and Bowerman. Nike was originally and officially named Blue Ribbon Sports as this was the company that originally sold the first orders of the brand of Knight and Bowerman. According to www.nikebiz.com, "They shook hands to form Blue Ribbon Sports, pledged $500 each and placed their first order of 300 pairs of shoes in January 1964. Knight sol the shoes out of the trunk of his green Plymouth Valiant, while Bowerman began ripping apart Tiger shoes to see how he could make them lighter and better, and enlisted his University of Oregon runners to wear-test his creations. In essence, the foundation for what would become Nike had been established." (www.nikebiz.com/company_overview/history/1960s.html)

The beginnings of the company essentially led to what later became known as Nike. The pair of Knight and Bowerman wanted to move beyond distributorship to create their own brand. According to www.nikebiz.com, "They selected a brand mark today known internationally as the "Swoosh," which was created by a graphic design student at Portland State University named Carolyn Davidson. The new Nike line of footwear debuted in 1972, in time for the U.S. Track & Field Trials, which were held in Eugene, Ore." (www.nikebiz.com/company_overview/history/1970s.html)

Indeed, the famed 'Swoosh' was not an original idea of the founders. This is important as many businesses whose founders profited from the venture had a direct idea with regard to a logo or a methodology of performing an operation that led to the highly profitable business model. The focus on the performance of the athletic shoe was an important innovation to the founding group that is a function of understanding the needs of various types of athletes and the type of athletic footwear the athlete do require.

By the 1980s, the company had espoused itself as a formidable presence in the athletic shoe market. According to www.nikebiz.com, "Nike entered the 1980s on a roll, thanks to the successful launch of Nike Air technology in the Tailwind running shoe in 1979. By the end of 1980, Nike completed its IPO and became a publicly traded company. This began a period of transition, where several of Nike's early pioneers decided to move on to other pursuits. Even Phil Knight stepped down as president for more than a year in 1983-1984, although the remained the chairman of the board and CEO." (www.nikebiz.com/company_overview/history/1980s.html)

The obvious success of the Nike brand was still in a nascent phase of its eventual peak within its cycle of growth, peak, and trough. According to www.nikebiz.com, "By the mid-1980s, Nike had slipped from its position as the industry leader. In part because the company had badly miscalculated on the aerobics boom, giving upstart competitors an almost completely open field to develop the business. Fortunately, the debut of a new signature shoe for an NBA rookie by the name of Michael Jordan in 1985 helped bolster Nike's bottom line." (www.nikebiz.com/company_overview/history/1980s.html)

The decision to incorporate Michael Jordan with the branding of Nike was a brilliant multi-billion dollar move that worked out to be perhaps the biggest single signing, risk adjusted, in the history of athlete advertising. Nike also made additional moves that facilitated a rebound from a lackluster commencement to the decade.

According to www.nikebiz.com, "In, 1987, Nike readied a major product and marketing campaign designed to regain the industry lead and differentiate Nike from its competitors. The focal point was the Air Max, the first Nike footwear to feature Nike Air bags that were visible. The campaign was supported by a memorable TV ad whose soundtrack was the original Beatles' recording of 'Revolution'." (www.nikebiz.com/company_overview/history/1980s.html)

Additionally, according to www.nikebiz.com, "In 1989, Nike's cross-training business exploded, thanks in part to the incredibly popular "Bo knows" ad campaign. By the end of the decade, Nike had regained its position as the industry leader, the first and only time a company in the athletic footwear/apparel industry has accomplished such a feat. Nike has never relinquished that position again." (www.nikebiz.com/company_overview/history/1980s.html)

The 1990s ushered in a new era of promise for Nike to locate and sign the next big athlete. Bike did sign players from the Brazilian National Team however no signing within the decade would be as significant as the signing that took place in 1996. Although not yet a prominent figure, Nike was able to visualize a future with the young talent and took a risk of signing the golfer to a whopping $5 million per year.

According to www.nikebiz.com, "In 1996, Nike Golf landed a vastly talented but as-yet-unproven young golfer named Eldrick "Tiger" Woods for a reported $5 million per year. Competitors laughed and critics howled at Nike's 'folly,' until Tiger won the 1997 Masters by a record 12 strokes. No one is laughing now." (www.nikebiz.com/company_overview/history/1990s.html)

Additionally, "Nike also began investing in the sport of cycling, including a promising young cyclist who appeared to be on his way to success until he was diagnosed with cancer. He lost most of his sponsors, but Nike elected to stay with him. In 1999, Lance Armstrong's incredible comeback resulted in the first of what would be seven consecutive Tour de France titles." (www.nikebiz.com/company_overview/history/1990s.html)

The cognition and signing of Lance Armstrong was another innovative marketing move to bring in new and younger audiences to the Nike brand. The relative popularity of the brand among cyclists ostensibly was not there and therefore Lance Armstrong was a bold addition to the list of Nike athletes. Nike's fortune has mostly resided in their ability to realize the most profound and driven athletes whom are capable of withstanding tribulation to the point of accentuating the level of resolve and grit that has become synonymous with the character displayed in the Nike commercials.

Industry

Nike competes in a broad and highly varied athletic footwear and athletic clothing industry with an oligopoly of major competition. Although there are many choices in athletic equipment, Nike faces its formidable competition from brands that include, Reebok, Adidas, And1, Asics, Converse, Crocs, and Heelys

. The most competitive opponent is now the Reebok/Adidas brand as the two entities have now formed one monolith to compete against Nike. Additionally, New Balance Athletic Shoe and PUMA are the second and third largest companies in market share that compete against Nike

Nike's markets are global in reach and in diversification. The company product offerings range from athletic clothing, gear, and equipment to its hallmark line of athletic shoes and accessories. The product line has changed over the years however the popular Jordan sneaker has remained as well as many new additions has emerged as favorites among the Nike enthusiast. The graphic below shows the areas in the global market to where Nike is active with manufacturing and sales.

Source: http://www.nikebiz.com/crreport/content/workers-and-factories/3-2-1-profile-of-factories.php?cat=profiles

One can see by reviewing the chart that Nike Apparel sole in south Asia is the largest revenue generator and is important to sustain and grow the revenue base for Nike in the future. South Asia had in fact decreased notably from its preceding year and may encounter future decreases as a function of time. Should the decreases continue the level of market share is likely to decrease in south Asia as well which will negatively impact revenue.

External Environment

The external environment is a function of Nike's ability to brand their product effectively to where the consumer is able to identify the brand as having a competitive advantage over its competition. According to Keller & Lehmann (2006), "Brand positioning sets the direction of marketing activities and programs-what the brand should and should not do with its marketing. Brand positioning involves establishing key brand associations in the minds of customers and other important constituents to differentiate the brand and establish (to the extent possible) competitive superiority (Keller et al. 2002). Besides the obvious issue of selecting tangible product attribute levels (e.g., horsepower in a car), two areas particularly relevant to positioning are the role of brand intangibles and the role of corporate images and reputation." (Keller, Lehmann, 2006)

Nike has successfully established its brand as a differentiated and competitive product against the competition's product line. The external environment is a function of the perception of the Nike brand, the quality of its product, and the accessibility of the product to the target market. Initially, Nike's were always the epitome of quality in the running and basketball shoe category. The pricing was also reflective of such dominance.

During the 1980s and 1990s, Nike prevailed consistently as the most expensive brand of sneaker on the open market. At man sneaker and athletic shoe outlets, Nikes of all types were generally more expensive than its competing brands. The Reebok brand named shoe line had offerings that were less expensive than Nike as did companies including Converse, Adidas, and Puma. However, everyone wanted a pair of Nikes. Why? The brand name marketing of the sneaker was phenomenal as an approach to holistically incorporate the brand name into all facets of human life and activity, along with tying popular athletes and songs to the commercial to further the impact.

Additionally, branding is a function of strategy which provides direction for the branding. According to Murphy & Bruce (2003), "Strategy is concerned with planning and the long-term survival and success of a business. It defines the direction for a firm; it specifies where the business is going and determines how it will get there. It also guides the company towards its financial objectives (Davies and Brooks, 1989). The essence of strategic planning lies with the consideration of current alternative strategic decisions, given possible threats and opportunities. In all, a major objective of any organization is the acquisition of a competitive advantage, which results from its appropriately selected strategic choices (Simomkos and Vrechopoulos, 2000)." (Murphy, Bruce, 2003)

Company Profiles

The table below provides the major competitors of Nike and the financial information regarding their operations and profitability.

Source: http://static.seekingalpha.com/wp-content/seekingalpha/images/shoes_01.jpg

The Market Share for Nike is 47% or almost half of the market belongs to Nike. The Adidas Group has 22% of the market as the merger enabled Adidas to obtain Reebok's market share and therefore grow its market share accordingly. Converse and New Balance have a much smaller percentage of the market at 3%.

Source:

http://www.unc.edu/~andrewsr/ints092/vandu.html

The market share for Nike and Adidas Group is combined in this presentation to provide a comparison approach to better understand how each competitor is doing against Nike.

The comparison between Nike and Adidas/Reebok (now referred to as the Adidas Group) can be reviewed in the financial comparison below:

The gross profit on sales for Nike and the Adidas Goup are approximately similar. Each has a formidable share of the market and when combined represent almost 90% of the market. Thenet profit on sales has Nike with a slight edge over Adidas in its ability to mitigate costs as a funciton of turning a profit. Adidas must do a better job in addressing costs to enable an increase in Net profit margins.

The ROA for Nike is twice the amount than the Adidas group. Nike has established a competitive advantage in the area of ROA. Ostensibly the Return on assets is the most important indicator of how a business is doing with its assets under management. Adidas may need to seek more established management to increase its ROA.

Source: http://wps.pearsoncustom.com/pcp_collins_explorebus_1/68/17646/4517570.cw/content/index.html

Revenues

Nike:

7 billion

Adidas Group:

1.78 billion

Converse:

New Balance:

Source: http://www.unc.edu/~andrewsr/ints092/vandu.html

Nike is well positioned against the current competition. The current ratio indicates that Nike has $2.81 to cover each dollar in expenses. The price to earnings ratio is about the lowest against its growing competition yet when considering Nike's market cap and the sales and earnings growth, the company appears to be a relative bargain. Sketchers USA is indeed a major competitor and with the recent addition of Kim Kardashian as a spokes model for the new shoe line, Sketchers USA is indeed a formidable company with enough 'oomph' in its line of products to take market share away from Nike.

Although Nike's operating margin is not the best in industry, that usually goes to the fastest growing company with ostensibly the lowest expense ratios and that currently is Crocs. However Nike's operating margin is rather healthy and indeed is competitive and considering the market capitalization of the firm the company is still well positioned to remain at the height of the industry.

Crocs are a specialized shoe company that is differentiated but has a limited line of product. Nike has a number of product lines including a multitude of shoe lines that provide a large number of repeat sales for the company. Crocs are indeed a company that Nike should review as a buyout considering its large growth. Although the company is pricey and the amount Nike would have to pay out is rather high, the prospect of having Crocs under its product line does provide a greater level of stability if obtaining Adidas is seen as too risky of a venture.

Nike has the most long-term debt of any featured competitors on the list. Nike has been in business the longest and has taken on the most long-term debt of any company as a function of its star-studded spokes people that represent the brand such as the long line of athletes that have worn the Nike name throughout their careers, including Ken Griffey Jr., Michael Jordan, Bo Jackson, and Tiger Woods.

Nike's net income margin is not as impressive as its operating margin. Indeed, the net income margin does show a rather large expense base that detracts from its revenue model. Many of the younger and smaller companies are more efficient and therefore are able to operate in a much leaner manner than Nike.

Table of Key Financial Ratios

Source: http://condor.depaul.edu/aalmaney/StrategicAnalysisofNike.htm

Source: http://www.investorguide.com/stock-fundamentals.php?ticker=NKE

The following matrix defines how Adidas and Reebok measure as competitors, with the rank indicating the competitor rank, weight indicating importance, and rating score indicating raw score after multiplying the weight by the rating.

Competitive Strength Assessment Table (Fiscal Reporting year ending 2010)

Against Adidas Group

Success Factors

Weight

Rating**

Score

Rating**

Score

1. Market Share

.07

4.5

.32

5

.35

Breadth of Product Line

.10

4

.40

5

.50

Sales Distribution Effectiveness

.06

3.5

.21

4.5

.18

Price Competitiveness

.10

2.5

.25

2

.20

Advertising Effectiveness

.14

4

.56

5

.70

Facilities location and newness

X

X

X

X

Production Capacity

.04

4.5

.18

5

.20

Relative Product Quality

.10

3.5

.35

4

.40

R & D. position

.18

3.5

.63

4

.72

Caliber of top management

.03

4.5

.14

5

.15

Customer Service

X

X

X

X

Experience Curve

.05

4.5

.23

5

.25

Corporate Culture

.05

4

.20

4

.20

Profitability Ratios

.08

4.5

.36

5

.40

TOTAL

1.00

3.83

4.25

The obvious trend from the analysis shows how Adidas is the superior brand in the Adidas/Reebok merger. Reebok does not have the financial or marketability that Adidas has and when in the stores and reviewing the purchasing decisions in society, it is rather obvious that Adidas is carrying Reebok as the sales of Adidas is vastly superior to that of Reebok.

The Adidas Group has reported the following financial results over the past 4 years.

Income Statement

Source: http://investing.businessweek.com/businessweek/research/stocks/financials/financials.asp?ticker=ADDDF:U.S.

Below is the balance sheet for the Adidas Group

Nike's Important sections from the Balance Sheet for the past five years is displayed below

Nike's financial position is indeed favorable to Adidas and certainly when compared to Reebok. Adidas is not a bad operating company when compared to the largess of Nike and the apparent superiority the company should have over Adidas. Adidas trades for approximately half of the price of Nike and has about half of the revenue that Nike earns. Indeed, Adidas would be an attractive buyout for Nike as Adidas continues to grow and obtain greater market share as a casual dress sneaker rather than the athletic.

The balance sheet reports strong numbers across the board for Nike subject to the lapse of 2007. However, the strength in the competition is cause for concern to Nike's established revenue model as such strong financial ratios are threatened to take a dive when considering the growth of the competition from brands such as Crocs. Nike remains strongly positioned against being overtaken by competitor. However, Nike's size is of concern when considering its employee base and the revenue generated per employee. The smaller companies are much smaller in employee size and although not as much revenue is generated per employee, the expense base is much lower and arguable the revenue driver for Nike has nothing to do with the number of underlying employees at Nike.

This is to say, Nike is likely able to lay off a number of employees, say thousands, and produce a 1:1 year over year return on revenue, at least, which when considering the decrease in cost, would be very beneficial to the shareholder and stakeholder in general. Nike's current strategy is in cutting cost, or cost reduction, however, the mode of how Nike will accomplish this cost cutting remains unclear.

The following graphic is a flowchart that shows Nike's internal human resources management model. This model is responsible for the depiction of how human resources transforms the operational business model and merges its goals with that of strategy and the human capital resources to enable Nike to meet its objective.

Source: http://www.nikebiz.com/crreport/content/workers-and-factories/3-9-1-our-approach.php?cat=hr

Ideally, Nike wishes to create a culture of high quality, low cost workers. This appears to be the trend across all industries and businesses as the notion of producing a large amount of highly skilled human capital will reduce wages to a market equilibrium to where a corporate CEO or CFO will no longer command the high salary but a more minimal salary, perhaps up to 60% of what the former salary would have been. When considering this effect all the way down to the line worker, there becomes an issue with the cost of living in comparison to the level of skill needed to perform on the job, the real value of that skill, and the relative compensation one is receiving for applying that skill within a labor force.

SWOT Analysis

Strengths:

Nike has a number of strengths including its financial position and assets under management

Nike operates as a very lean organization, other than its employee base/size.

The Research and Development for Nike is first rate and ostensibly is best in industry. The only realistic competitor(s) are New Balance and possibly Asics.

Nike's cash flow enables its financial stability and allows for investment into additional areas.

Weaknesses:

Nike's sales outside of the U.S. are not in its key area of athletic footwear. In the U.S., athletic footwear is its number one market.

Nike's weakness in athletic footwear in the large Asian market leaves the organization vulnerable to outside competition that is able to penetrate this market successfully and engage its consumer base.

The growth of competitors relative to Nike's areas of weakness in athletic shoes, for a water friendly shoe and an all-purpose line of shoe such that is offered by Sketchers.

The causal line of shoe that has made K-Swiss and Adidas popular are also seen as a weakness to Nike.

Profit margins are squeezed more so for Nike than its up-and-coming rival competition.

The profit margins are seen as how well the company is able to manage costs and turn expenses into revenue.

The smaller companies are doing a better job in this area than is Nike

Opportunities

Nike has a stellar Research & Development team that is known for developing the most innovative and unique sneaker designs in contemporary athletic footwear.