Nike vs. New Balance: Competitive Strategy Comparison

Introduction

In recent years, competition among organizations that manufacture and sell athletic apparel and athletic shoes has dramatically increased. As a result, competitive strategies have emerged as key factors in determining the long-term success or ultimate failure of such organizations. Two large rival companies that have demonstrated extreme success as well as periods of instability and weak sales are Nike and New Balance. An analysis and comparison of their cost leadership and differentiation strategies provides a clearer picture of what types of competitive strategies are essential for an organization to survive in today's competitive economy.

This paper critically examines the current competitive strategies of Nike and New Balance and analyzes whether an organization can simultaneously follow a cost leadership strategy and a differentiation strategy. It compares the various approaches used at both organizations as implemented by their successive CEOs, in light of the five generic competitive strategies laid out by Michael Porter's Five Forces framework, and offers conclusions based on those comparisons.

Overview of Nike and New Balance

Nike is the leader in the footwear industry, owning approximately 47% of the market share, with its nearest competitor, Reebok, holding 16% (Dusen, 1998). Nike's domestic annual sales average $3.77 billion, and the company has been manufacturing throughout the Asian region for over twenty-five years. The leadership style of Phil Knight, the founder and former CEO, has been attributed to Nike's repeated success and its ability to recover during economic slowdowns. Knight's leadership style has been described as quiet, low-key, and hands-off. He values great salespeople and does not directly tell them what to do; instead, he provides them with the means to achieve company goals and favors hiring people who have actively participated in sports.

Knight's approach can be described as a goal-setting style. Goal-setting theory argues that employees set goals and that organizations can influence work behavior by shaping those goals. The major concepts in the theory are intentions, performance standards, goal acceptance, and effort expended; participation in goal setting is thought to increase commitment and acceptance. This approach appears to be highly effective at Nike, as Knight's employees were reportedly very loyal and committed, describing him as so inspirational that they wanted to work harder.

Nike currently has over 500,000 employees directly engaged in the production of its products. The company utilizes an outsourcing strategy, relying exclusively on subcontractors in factories across China, Indonesia, Vietnam, Italy, the Philippines, and Taiwan. Nike employs teams of four expatriates in each major country to focus on both product quality and working conditions, with weekly factory visits (Dusen, 1998). However, given the breadth of its manufacturing network, Nike has faced widely publicized violations involving factory conditions and human rights issues (Dusen, 1998). The company has continued to address these concerns and has made substantial progress on an international level.

Nike has repeatedly demonstrated its ability to recover from major setbacks. For example, when sales and revenue declined, Knight returned from retirement — on two separate occasions — to turn the company around. At Nike, employees are given considerable autonomy; they are free to make their own decisions and receive relatively little top-down direction. When selecting his successor, Knight chose a former athlete who still participated in sports during time off, because an internal love of sports was considered essential to achieving the company's goals. In this sense, Nike can be described as a company built on the values of a true athlete with a genuine love of sports.

New Balance is a footwear company that has been in operation almost as long as Nike. However, it differs from Nike in several significant ways. New Balance is known for designing and marketing what is widely regarded as the premier running shoe in the industry — a niche the company has controlled for several years. New Balance has maintained a substantial portion of its manufacturing in the United States, currently operating five plants in New England that employ over 1,400 workers and produce approximately 50% of its products (Dusen, 1998). The company holds a 3% market share with sales of $260 million and uses a mixed strategy of vertical integration and outsourcing, based on the advantages it derives from higher domestic quality standards and its well-publicized "Made in the USA" label (Dusen, 1998).

The leadership style at New Balance follows a more traditional management approach — a variation of transformational leadership that has been strongly emphasized in the United States for over twenty years. The benefits of transformational leadership are thought to include broadening and elevating the interests of followers, generating awareness and acceptance of the group's purposes and mission, and motivating followers to go beyond their self-interests for the good of the organization (Bass, 1985). By defining the need for change, creating new visions, and mobilizing commitment to those visions, leaders can ultimately transform organizations (Hartog et al., 1999).

In the late 1980s, New Balance CEO Jim Davis observed that the company's younger markets were shrinking as a result of more than two decades of births below replacement levels (Wolfe, 2006). He also recognized that older populations were entering a period of explosive growth and redirected the company's focus toward consumers aged 40 and older, following the principles of ageless marketing. New Balance successfully implemented this concept as a result of its strong customer loyalty. The unexpected mass appeal of its 800 line of trail running shoes propelled New Balance from eighth in the industry in 1995 to fourth today, behind Nike, Adidas, and Reebok (Wolfe, 2006). In the three years prior to the study, New Balance increased its market share from 3% to 10%, while Nike dropped from 48% to 43% and Reebok fell from 15% to 12% (Wolfe, 2006).

Porter's Competitive Forces Model

Beyond its competitive advantage of offering more shoe widths than is customary in the industry, New Balance resonated deeply with aging baby boomers by appealing to the more introspective, individuated, and autonomous sensibility typical of people in middle age (Wolfe, 2006). Over the five years preceding the study, New Balance averaged 25% annual growth — an achievement attributed in part to older consumers who may have worn the brand in their youth. In this way, New Balance can be described as a footwear company focused not on a love of sports, but on a search for deeper meaning in life.

Michael Porter's Competitive Forces Model is a strategy tool used to analyze the value of an industry's structure. The model examines five fundamental competitive forces: (1) the threat of new entrants, (2) the threat of substitutes, (3) the bargaining power of buyers, (4) the bargaining power of suppliers, and (5) rivalry among existing players (Value-based Management.net, 2006).

The threat of new entrants refers to how difficult or easy it is for new competitors to enter the market, based on existing barriers to entry. The threat is greatest when barriers are low. New entrants may already be active in one geographic region and seek to expand into others, or they may come from an adjacent industry that has diversified. The threat of substitutes refers to how easily a product can be replaced or manufactured more cheaply. When more substitutes become available, customers have greater alternatives, and the ability of existing firms to raise prices is constrained.

The bargaining power of buyers examines the strength of customers' market position and their ability to coordinate in placing large-volume orders (Value-based Management.net, 2006). Buyer power is strong when there are few buyers who collectively dominate the market, setting prices on their terms. Buyer power is weak when a producer controls its own distribution and retailing. The bargaining power of suppliers refers to the leverage that raw material and component providers hold over producers. If suppliers can sell inputs at high prices or restrict availability, they capture a share of the industry's profits. Finally, rivalry among existing players measures the intensity of competition among firms already operating in the industry (Value-based Management.net, 2006). The following sections examine each of these forces in relation to Nike and New Balance.

Conclusion

A review of the literature on Nike and New Balance indicates that a company cannot simultaneously follow a cost leadership strategy and a differentiation strategy. This is because both strategies require conflicting operational and manufacturing orientations. Cost leadership works best for a large company like Nike, which can expand the scale of its operations to drive down per-unit manufacturing costs. The final product associated with each strategy also differs as a result of the nature of the company: Nike does not manufacture a product considered unique but instead produces a wide range of shoes for different sports.