Essay Instructions: You are to write a 3-page paper Response on the Case Study Below. Do Not Use Outside Sources. Only Use The Information From The Case Study to write the 3-page response.
Nike
www.nike.com
The year 2003 was a year of firsts for Nike. The company had the highest revenue in its history and also earned more revenue outside the United States of the first time. However, the Company continues to deal with controversies on a number of fronts such as manufacturing ethics, lawsuits, and criticism of the high endorsement fees paid to athletes. CEO Philip Knight seems resigned that this view of Nike and the public’s view may not always mesh. One thing has not changed. I still cannot capture the essence of the company. The world will never view Nike as I do. Where others see controversy, I see impact. Where they see record sales, I see the next year’s goal. Where the world sees endorsement contracts, I see the validation by the greatest athletes of our time. When the world is in doubt about Nike is when I am most certain of our ability to compete and win. Net income in 2003 for Nike $740 million increase by 11% over 2002. For the fiscal year 2003, revenues at Nike, increased by 8% over 2002 to $10.7 billion. Nike sells athletic shoes, accessories, sports equipment, and clothing of men, women, and children.
The Nike name and logo have such high consumer awareness that the company no longer includes the Nike that the company that name on its products; the ‘swoosh’ logo is all that is needed. The company’s products are sold to approximately 18,000 retail accounts in the United States including department stores footwear stores, sporting goods stores. Nike also sells its products through independent distributors, licensees, and subsidiaries in 200 countries around the world. Approximately 30,000 international retail outlets sell Nike products. Nike operates a total of 24 distribution centers in several different international markets: Asia, Canada, Latin America, Europe, and Australia, and operates 161 retail stores in United States including 75 factory outlets, 4 Nike stores, 65 Cole Hann stores, 4 employee only stores, and 13 Nike-Town stores. Over 50 percent of total revenue in 2003 came from international sales. Countries that have the largest Nike business include: United Kingdom, Japan, France, Italy, Spain, Germany, and Canada. Revenues increased in the Europe and Asia-Pacific geographic regions in 2003, while in the US and Americans footwear segments and the Americans apparel regions has decreased in the cells from the previous year.
Nike Vision and Mission
Vision: to bring inspiration and innovation to every athlete in the world.
Mission: Nike is the largest seller of athletic footwear and athletic apparel and the world. Performance and reliability of issues, apparel, and equipment, new product and development, price, product and unity to marketing and promotion, and customer support in servers are important aspects in the athletic footwear, apparel, and equipment industry… we believe we are competitive in all of these areas. The company aims to leads and corporate citizenship through proactive programs that reflect caring for the world family of Nike, our teammates, our consulates, and those who provide services to Nike.
History
Phillip knight, a dedicated long-distance runner, develops a plan to make low-cost running shoe in Japan and to sell them in the United States as a part of his work toward an MBA degree at Stanford University. After graduation, knight teamed up with the Bil Bowerman, his former track coach at the University of Oregon, to make his plan a reality by starting blue ribbon sports in 1964. Blue ribbon sport shoes gained a cult following among serious runners because knight distributed to shoes, called Tigers, at track meets. In 1971, blue ribbon sports received a trademark on its ‘swoosh’ logo and the Nike brand name was introduced. Blue ribbon sports officially changed its name to Nike in 1978. During the late 70s and early 1980s, Nike researchers used the technological expertise to develop several types of and issues that revolutionized the industry. The company became more and more successful each year with its profits increasing steadily during this time. In 1988, Nike purchased New Hampshire-based Cole Hann for $64 million. The subsidiary currently has several brand names including CH, G-series by Cole Hann, Brangano, Cole Hann. Nike’s casual footwear business grew 16% of following year. Nike also acquired the Cole Hann accessory company in 1990, a distributor of premium quality belts, braces, and small leather goods. The same year, Nike opened its first retail store called Nike-town, in Portland, Oregon; it purchased a cap-making company called sports specialties (now called Nike team sports, Inc.) in 1993, and in 1994, the outdoor division at it a new shoe called Air Mada and the Nike sports sandal became the top seller in the market. In 1995, Nike acquire Canstar Sports, Inc. (the world’s largest hockey equipment maker), for $409 million. Canstar now called Bauer Nike Hockey, Inc., manufacturers in-line roller skates, ice skates and blades, protective gear, hockey stick, and hockey jerseys. The Michael Jordan collection basketball clothing was launched in 1998. Clothing Jordan collection and sports stars Randy Moss and Derek Jeter were hired to promote the Jordan brand in 1999. A new line called ACG( All Condition Gear) that sales gear for snowboarding, skate-boarding, surfing, and mountain biking was launched in 1989.
Present Conditions
The company has made several changes in recent years in its attempt to gain market share and all for a draw a range of sports shoes and apparel products. Two Nike Goddess stores, geared toward the sales of women’s clothing and footwear were opened in Los Angeles in 2001. Nike purchased impact golf technologies in 2002 so the company could manufacture of golf clubs. It began selling three brands of apparel in spring 2002 to provide different brands to different types of customers: Nike performance (for athletes), Nike Active (gym to Street wear), and Nike Fusion (stylish clothing made for high-performance fabrics). In September 2003, Nike acquired Converse for $305 million to increase its offerings in the currently popular retro and plastic shoe market. The company’s Hurley brand, acquired in 2002, sells youth oriented shoes and apparel for surfing, skateboarding, and snowboarding. Foot-locker announced in 2002 that it would only purchase only about half as many Nike products in the future, because of a company decision that foot locker would sell more lower-priced shoes and not as many high-priced Nike shoes. This is a significant issue since 10.9% of Nike revenue came from Foot-locker in fiscal 2002 ($800 million in wholesale cost). Foot-locker canceled millions of dollars in Nike orders in protest of high wholesale prices, and Nike retaliated by stopping shipments of its most popular shoe to Foot-locker stores. This disagreement will be a significant cost to Nike the short run.
Competition
The athletic shoe industry has changed tremendously since sneakers were invented. In 1873, the sneaker was developed from India rubber and canvas material. Dunlop became the dominant seller of sneakers in 1938. Keds and PF Fliers dominated the children’s market in 1960. Adult standard brands such as Adidas and converse were a well accepted by sports enthusiast for years. When Nike entered the market in the late 1960s, the industry change forever. In addition to new competition, lifestyles began to change and companies begin to contract manufacturing rather than invest in plant and equipment to manufacture their own products. The major competitors in athletic shoe industry are Nike and Reebok, who hold 39 percent and 11 percent market share respectively. Some of the other two dozen competitors in the industry include Adidas-Salomon AG, New Balance, K-Swiss, Fila, Asics, and Keds. Designer brands such as Tommy Hilfiger and Nautica have entered the athletic shoe market by providing shoes for fashion minded young people. Fashion shoe brands, such as Vans and Skechers, which appeal to teenagers and young adults, are taking some market share from major competitors. Vans, a California company specializing in a boarding shoe, earned $15.5 million in 2001, but lost $2.6 million in 2002. Skechers head almost $1 billion in sales in 2002 and a net income of $47 million. The most intense competition continues to be among the injured leaders: Nike, Reebok, and Adidas.
Reebok International, Ltd.
Reebok designs and develops athletic shoes and clothing for sale worldwide. The company sells athletic shoes in different color combinations for aerobics, cycling, volleyball, tennis, fitness, running, basketball, soccer, walking, and children’s footwear, and recently diversified its offering to include more types of casual shoes, sports clothing, and other types of athletic shoes, and sports related equipment. There are currently 204 Reebok factory direct stores in the United States. The company’s four product divisions include: Reebok, Greg Norman Collection, Rockport, and Ralph Lauren footwear. In the early 1980s, Reebok sold aerobic shoes primarily to women, but by the mid 1980s large numbers of men were buying Reebok shoes. The company’s shoes are designed to make a fashion statement and are marketed to build on this image. Reebok took the lead in revenues from Nike in 1987, but Nike regained its lead over Reebok in 1990. Despite Reebok’s marketing efforts, the Company continued to lose ground to Nike in the 1990s. Reebok developed a series of marketing campaigns around sports stars in an effort to increase its market share. Some of the sports personalities who signed marketing contracts with Reebok include Julie Foudy, Venus Williams, Allen Iverson, Peyton Manning, Byron Leftwich, Greg Norman, and Roger Clemens. In August 2001, Reebok signed a 10-year contract with the NBA to provide all court apparel beginning with the 2004-2005 season. Reebok has 300 NFL endorsers; 50 to 75 are high profile football stars. Reebok introduced the Rbx brand in 2002, and launched a retro footwear line inspired by Jay Zee in 2003 and a shoe call the G-Unit collection that gets promoted by 50 Cent. Current NFL and NBA teams that are supplied apparel exclusively by Reebok had been paid a total of $450 million by Reebok.
International Competition
Competition is increasing in Europe. Adidas-Salomon AG, a German company, is the number one seller of athletic shoes in Europe and number two worldwide. Analysts believe that doing well in the Europe market is crucial to the continued success of companies in the athletic shoe industry. Nike sale in Europe, Asia, Canada, and Latin America increased almost $4.4 billion in 2002 and to$5.127 billion in 2003. Both Nike and Reebok hope to continue increasing their presence in international retail market. Adidas, a top European owned competitor, both be fighting to maintain its 15 percent of worldwide share of the competitive market for athletic shoes. Founded in 1948, Adidas outfitted such sports stars as Al Oerter (1965 Olympics) and Kareem Abdul-Jabbar (NBA). That may disputes in this family owned company threatened its success after it gained a 70 percent market share in the United States. One brother became so angry he found a rival company Puma. During this time, the US market share dropped from 70 percent to 2 percent. The company was sold in 1989 for $320 million. The new owner became involved in other issues and neglected accompany. By time the current CEO took over in 1993, Adidas was losing about $100 million per year. When asked what he knew about the athletic shoe industry, the CEO Robert Lewis Dreyfus replied, “All I did was borrow what Nike and Reebok were doing. It was there for everybody to see.” By 1996, the company’s successes were evident: it equipped 3,000 Olympic athletes and these athletes won a total of 220 medals; US market share doubled in 1998 and 12 percent and the following year the company added in line states to its product mix. Adidas-Salomon AG brands include: Adidas (footwear, balls, bags, and apparel), Salomon (ski equipment and apparel, hiking boots, and in-line skates), Cliché (skateboarding), ArcTreyx (outdoor clothing and equipment), Taylor Made (golf equipment), Mavic (cycle components), and Bonfire (winter sports clothing). Some of the sports stars who currently have endorsement contracts with Adidas include NBA players Tracy McGrady and Tim Duncan. Adidas bought a high altitude climbing and clothing company called ArcTreyx in 2002. Adidas sales and net income in US dollars were $6.8 billion and $240 million respectively.
Economic Conditions
Total US sales of athletic shoes increased in 2002 to $15.69 billion, representing a 2.5% increase over 2000. Beginning in fall 2000, consumer confidence began to decline and slow general economic growth continues through 2003. After the terrorist attacks on September 11, 2001, the US economy continued to falter and there was a sharp drop in demand or the shoes. Athletic shoe manufacturers have also experienced economic crises in some international markets. For example, in fall 2002 there was a two-week locked out of dockworkers that delayed some shipments of Far East manufactured goods to retailers. In addition, the impact of foreign currency fluctuations in interest rates change has the potential to create financial problems for athletic shoe manufacturers. The transition toward the euro has also created some economic pressures in the European Union countries that recently converted their currency to the euro. 10 new countries are scheduled to join the EU in May 2004, making the EU market that has common currency and trade rules much larger for competitors. Most athletic shoe company’s contract with manufacture companies in the Far East to produce their shoes. Some of the countries that manufacture shoes for Nike, Reebok, and other companies include South Korea, Taiwan, China, Thailand, Malaysia, and Indonesia. The athletic shoe companies develop design specifications and technology issues and the United States and then send these to the factory to be produced. The primary advantage of foreign contract manufacturing is that no Investment is required and that right shoe companies can operate with very little long-term debt. There are also several disadvantages to contract manufacturing. Some countries, such as Korea, that have produced large numbers of athletic shoes and pants are developing the expertise and contracts to begin producing more sophisticated electronics products and do not have available capacity to continue producing athletic shoes. Some additional disadvantages of overseas production include labor unrest, political unrest; delay is caused by shipping, and unreliability of quota systems (embargoes).
Social Factors
Beginning in the late 1970s, athletic shoe buyers became brand conscious and a major competitors relied on their well-known brand name to sell their products. In recent years, consumers have changed their view of athletic footwear/clothing as fashion accessories. Athletic shoe companies began having some difficulty selling their products to the youth market in 1997 due to the youth demand shift to hiking boots and casual leather shoes. Most recently, the fashion for athletic shoes is a classic look or retro style athletic shoe. The ages potential consumer present some unique challenges for athletic shoe/apparel company. Generation Y. children (born between 1979 and 1994) rivaled the size of the baby boom generation; they are 60 million strong a significant market in the future. Generation Y Consumers prefer fashion oriented sportswear rather than athletic brand clothing. A generation Y. population responds differently to advertising and other generations; this group is not swayed by glossy national advertising campaigns. They respond to truth in advertising and are more cynical and practical and other generations. Typically, generation Y. members prefer to use the Internet as a source for product information; they are an important target market for athletic shoe companies. Members of the large baby boomer generation are interested in staying fit and healthy and became obsessed with exercise in the late 1980s. Currently, exercise is not as popular as a pastime for baby boomers as it was in the early 1990s, but demand clothing/footwear leisure activities continue to increase for this group. Changes in lifestyle of girls/women will likely impact the industry. Since the mid-19 90s women have purchased more athletic shoes than men have. In addition, more girls are involved in sports today than ever before. There are currently more than 13 million women and girls who play basketball and approximately 7 million will play soccer.
Legal/Regulatory Issues
The global marketplace has many legal protections that athletic shoe manufacturers must consider. Both in North America free trade agreement (NAF TA) and the General agreement on tariffs and trade (GATT) provide better access to world trade. Companies operating in Mexico and Canada will benefit from reduced import/export duties outlined in the NAFTA agreement. GATT provide commitments for access to international markets and tariff reductions on many products. The European Union increased out of European countries control imports, and has also provided a single, coordinated market rather than many different markets in Europe. In 1995, at the request of European footwear manufacturers, the EU impulse anti-dumping duties are athletic footwear imported to the EU China and Indonesia. In 1995, United States restored diplomatic relations with Vietnam, a potential high by them producer of athletic shoes. President Clinton ordered most favored nation status (MFN) status for China and Congress supported the president’s decision in 1999. Since China is a major source of footwear production, it is critical for the athletic shoe companies that MFN status for China continues. In May 2003, President Bush renewed normal trade relations for Vietnam, providing additional manufacturing opportunities for athletic shoe companies. These legal changes, along with country-specific laws, to provide for many opportunities and some threats to for international business operation.
Nike Internal Factors
Five primary internal factors for Nike include superior research and development efforts for the company’s products, marketing/distribution expertise, social responsibility, management style/culture, and financial returns.
Nike Research and Development
Nikeis able to stay on the cutting edge and technology because research and development in the athletic shoe industry is largely design innovation and does not require a large investment in equipment. In 1980, the company formed the Nike Sport Research Laboratory (NSRL), which uses video cameras and traction testing devices and researches several types of concerns including: children’s foot morphology, ‘turf toe,’ and apparel aerodynamics. In addition, NSRL evaluates ideas that have been developed by the advance product engineering (APE) group. APE is involved in the long-term product development. Shoes are created for five years in the future. This group developed cross training shoes, Nike Footbridge stability device, inflatable fit systems, and the Nike 180 air cushioning system. The company also uses its knowledge of technology to improve sports clothing. In June 2000 Nike introduced the Swift Suit, a full length the body suit designed to help runners keep muscle warm and reduced drag. One of the newest footwear developments in a spring-loaded shoe called Nike Shox that was introduced after 16 years of research and development. In addition to their laboratory work, Nike designers visit athletes to learn the more about shoot technology. In 1996, Nike staff worked with the Philadelphia 76ers to test a variety of issues and Nike’s 1999 Air Seismic cross trainer was the result. In 1997, Nike designer visited Mia Hamm to learn her expectations of women’s soccer shoes and the company designed a lightweight shoe with a fiber cushion and foam. Nike continues to rely on superior technological developments to differentiate its products competitors.
Marketing
Since Nike does not actually produce shoes, the main focus on the company is creating and marketing its products. Nike sells its products online through www. Nike.com and Phil Knight meets with the intranet team daily. The online store sells a variety of products including shoes, equipment, and apparel. Nike positions its products as high foremen shoes designed with high technology features. The general target market for Nike athletic shoes is males and females between the ages of 18 and 34. Nike’s current strategy is to target women more aggressively. The company created Nike Goddess stores and began marketing toward women who have an active lifestyle. In 2002, Nike introduced women’s yoga shoes in an attempt to appeal to health-conscious women who do not see themselves as athletes. Currently, 20% of Nike’s sales are two women while the entry average is 50 percent.
Nike advertises its products in a variety of ways and targets its advertisement to specific groups or types of people. Advertising expenditures was $1.0279 billion in 2002 and $1.168 billion in 2003. The company continues to spend advertising dollars on TV advertisement during professional and college sports events, primetime programs, and late-night programs. Primetime advertising are intended to reach a broad range of adults and late-night TV advertising is geared toward younger adults. Print is also very important advertising Nike products. Print media such as sports illustrated, people’s magazine, runner’s world, Glamour magazine, self magazine, tennis, money, bicycling, and Weight Watchers are also important in advertising Nike products. The company had a significant sponsorship for the 2003 Tour de France bicycling team with Lance Armstrong, who won the event for the record fifth time. Currently, Nike sponsors the Turkish, Mexican, and Korean national soccer team and the company-sponsored the international in-line skating Association marathon tour in 2003. Some of the celebrity spokespersons for Nike include Michael Jordan, Andre Agassi, Mia Hamm, Marion Jones, Brandi Chastain, Vince Carter, David Duval, Kobe Bryant, and Tiger Woods. Tiger Woods signed a reported $90 million deal in 1999 to promote Nike golf wear. In September 2000, Tiger Woods signed a five-year extension on his endorsement contract worth an estimated $100 million. In 2003, an 18 year-old professional basketball star LeBron James signed a $90 million contract. International marketing efforts continue. Nike has operations in 200 countries on 6 Continents. Nike is already number one in the overall footwear market in Spain, France, Belgium, Holland, Luxembourg, Finland, Italy, and United Kingdom. Some of the new markets that are now being pursued include Chile, Peru, Bolivia, India, Mexico, South Africa, and several Eastern European countries. Wieden and Kennedy, the advertising agency responsible for most of Nike’s advertisement, has offices in London, Tokyo, and Amsterdam so that advertising can be developed by local people to fit with local cultures.
Distribution
Nike opened a 630,000 square feet apparel distribution center in Memphis in 1992 that is called Nike Next Day. Footwear is distributed by centers and Greenland, New Hampshire, Wilsonville, Oregon; and Memphis, Tennessee. Nike apparel is shipped from the Memphis distribution center. Cole Hann and Bauer products are distributed Greenland, New Hampshire, and Hurley products are shipped from Costa Mesa, California. The company operates a “Futures” ordering program that allows retailers to or not to six months in advance and be guaranteed to receive their orders within a certain time period and at a certain price. However, Futures retailers can receive apparel orders the next day if they are place their orders by 7 p.m. the day before. Nike automatic replenishment system provides automatic shipments to high volume merchandisers in an effort to ensure a constant supply for retailers. In 2003, 91 percent of US footwear and 67 percent of US apparel shipments were ordered under the future programs. Knight worries that the brand will’s image as a technically superior sport shoe if international marketing is not monitored carefully. Nike has purchased distribution operations of many of its worldwide distributors in an attempt to control marketing of Nike products. Some of these Nike-owned countries include: Singapore, Taiwan, Hong Kong, New Zealand, Korea, Japan, and Malaysia. This severe acute respiratory syndrome (SARS) outbreak in China in 2002/2003 made it hard for Nike to coordinate its production and distribution efforts and to ensure a quality, since travel was restricted to some areas where production and digitations centers were located.
Social Responsibility
Nike has been criticized in the past few years for employment practices and its international manufacturing sites. Some consumers are concerned about exploitive practices of managers in some Asian countries. For example, 2001, Indonesian factory managers making Nike products were charged with sexual harassment, physical and verbal abuse, protection and health services, and force overtime. In addition, some of these managers were charged with requiring employees to misbehave or are late for work to run laps or clean toilets. Nike promised to investigate and improve inappropriate conditions whenever they exist. The Company first set up a labor practice department in 1996 and in 1998 the position vice president of social responsibility was created. In 1988, Nike joined the fair labor Association (FLA), a sweatshop monitoring organization founded by a presidential task force made up of apparel manufacturers and human rights organizations. The company also belongs to the global alliance for workforce in communities (GAWC), a business group whose objective is to improve factory employees’ work lives. Nike’s leadership on labor initiatives in factories producing its products. In addition to his membership in the FLA and GAWC, Nike has developed a process for ensuring that its factories complied with the company’s code of conduct. Nike has developed several programs that show is concerned about social responsibility issues and the company provides contributions to several charitable and nonprofit organizations. Some of the organizations Nike supports include: world wildlife fund, boys and girls clubs of America, national head start Association, Special Olympics, YWCA of the USA, and the junior golf program. Nike’s target is to give 3% of pretax profits to charitable causes; in 2003, it gave $30.7 million in cash and in kind gifts to charities. NEAT (Nike Environmental Action Team) was formed in 1993. The purpose of this growth is to pursue environmental initiatives in regard to recycling old athletic shoes and reusing them in new product. Nike recovers 2 million pairs of shoes each year in its reuse-a-shoe program recycling. Nike’s attempts to reduce its impact on the environment through the reuse—a—shoe program and other initiatives. In addition to bad public relations due to manufacturing ethics, the company had to defend itself against a false advertising lawsuit in 2002. Marc Kasky sued Nike for false advertising after accusing Phil Knight of lying when Knight responded to questions about Nike sweatshops in a letter to the editor printed in the New York Times. The California Supreme Court ruled this speech as commercial speech that is regulated by the Federal Trade Commission and subject to deceptive advertising regulations. In June 2003, the US Supreme Court dismissed the case, but suggested that speech by Knight was not purely commercial speech. The case went back to the California Supreme Court to be reviewed.
Management Style/Culture
Phil Knight has created a strong culture at Nike based on company loyalty and locker-room camaraderie. Most corporate employees are health-conscious young people and Knight trusts these employees to Just Do It. His philosophy is, “play by the rules, but be ferocious… it is all right to be Goliath, but always like David.” The 74 acre corporate campus of Nike provides a sense of culture: it has wooded areas, running trails, a lake, and a fitness center. Knight believes that people should find a sense of peace at work. During 1998and 1999, Nike restructured the company to take advantage of cost savings and to improve operating efficiency. Employees are terminated from all areas of Nike including international and domestic workers. Phil Knight called a meeting of all company headquarters employees in 1998 and apologized for not paying more attention during the company’s boom years and for not being prepared for the years of hard times that followed. Mark Parker and Charlie Denson took over day to day operations as co--presidents of Nike in 2002. Parker had Nike experience in product research and development and Denson had previously worked in a variety of sales management positions with the company. In 2003, Knight admitted that Nike got to be a $9 billion company with a $5 billion management.
Finance/Accounting
During its year’s rapid growth, Nike managers encouraged free spending to develop and market company products. After cost-cutting layoffs and a search for efficiency that started in 1998, vice presidents began to spend more time making employees aware of the necessity of financial accountability. Each geographic region manager was given a profit and loss statement in 1988, and now compensation is partly tied to performance. Note that revenues for 2003 increased by 8 percent over 2002 while net income increased by 11 percent.
Future Outlook
Even with limited US growth and intense global competition in the athletic shoe/apparel markets, Nike managers expect that the company will for well in the future. It plans to double its current sales of women’s products ($1.5 billion) by 2005. More Nike Goddess stores are planned in 2004 and beyond. By 2007, Nike expects global soccer revenues to reach $1 billion. The Company believes that Hurley products and Converse retro styles will allow Nike to appeal to younger people.
