Nike Strategic Analysis: Industry Position and Growth Strategy

Company and Industry Overview

Nike was founded in 1964 as Blue Ribbon Sports and became Nike in 1971, established 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 its 2018 Form 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, the Jordan brand, and others. Nike's revenues in 2018 were $36.397 billion, up nearly 6% from the prior year. Net income was $1.933 billion, though this figure was down significantly from the previous year as the company recorded a much higher income tax expense.

Nike competes in the sports apparel industry, which is estimated to be worth approximately $184.6 billion worldwide, meaning Nike holds roughly a 19.7% market share. The industry is mature but still growing, with a compound annual growth rate (CAGR) of 4.3% over the past five years. Nike's major competitors are large, sophisticated companies, including Adidas, Puma, Fila, Umbro, Ralph Lauren, and lululemon (Bisht, 2015).

Companies that have not succeeded in this industry are mainly those that were unable to scale, though some relatively successful firms — such as Reebok — found themselves becoming 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 in by design and marketing, while strong back-end operations ensure that products are manufactured, reach the market efficiently, and costs are kept under control.

Macro-Environmental Forces

The political and legal forces in the industry are minimal, though there is some impact from laws governing environmental pollution and the treatment of workers. These laws typically affect Nike's third-party suppliers, but such issues carry a knock-on impact for the company itself. Taxation is the other major area that affects Nike, as last year's net income figures clearly demonstrate.

This industry operates under a model of monopolistic competition. There is some product differentiation, but not as much as the marketing of each company suggests. 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 significantly impacts the industry, as much of the purchasing in this sector is discretionary. This applies both to how much athletic apparel consumers buy and which brands they choose. During tougher economic times, consumers may shift away from premium brands like Nike, as was observed in 2017 when the high-end sneaker market was struggling (Salzman, 2017).

Successful firms in this industry must master social forces. The apparel and footwear businesses are driven by style trends, and these can fluctuate considerably. The 2017 slump in Nike's US sales — even as the company's global revenues grew that year — was driven by shifting consumer trends. Furthermore, athletic apparel is influenced by the popularity of particular sports and athletes, and by how much people in a given society exercise. Nike tends to perform better in markets with higher rates of physical activity. Technological forces can also have a noticeable impact on the business, affecting apparel design and high-end fabric development, as well as marketing and supply chain management.

Firm-Level Strategy and Financial Position

Nike's firm-level strategy is to be a differentiated player. The company has staked out a premium position in its industry and supports this positioning through both its marketing and its products. By competing in athletic apparel, footwear, and select equipment categories, Nike is able to market similar products to the same consumer base through the same channels. Nike frequently utilizes third-party retailers as a key part of its strategy, an approach that allows the company to concentrate on design, development, and marketing — its three core strengths.

Nike maintains a fairly strong financial position. It is consistently profitable and has sufficient pricing power to sustain that profitability. According to the financial statements in the most recent Form 10-K, Nike is both solvent and liquid, and has been steadily increasing its earnings per share. It carries a low level of long-term debt. However, its asset base declined last year, which contributed to a decline in the book value of its equity. While Nike is generally in strong financial shape, these developments at least warrant continued observation.

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

Nike, Inc. (2018). 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