Nike – Recent Enviromental Changes
Nike – Recent Enviromental Changes
Founded in 1968 in Oregon, Nike’s business activities involve design, development and the worldwide marketing of high quality apparel, equipment, footwear and accessory products.
Nike sells to approximately 140 countries around the world and currently boasts an approximate revenue of $8,776,900,000 These revenues are based on product sales of shoes, clothing, and other sports products. Advertising expenditures currently total $223,300,000 and include the following allocations: $64,975,000 for network television, $31,447,000 for consumer magazines, $7,700,000 for spot television, $343,000 for newspapers, $134,000 for outdoor postings, and $36,000 for radio. (Reed Elsevier) Most footwear products are made outside of USA. However apparel products are produced in the USA and abroad. (www.statcan.ca)
In this article we will try to explore the interaction between the company Nike and its external business environment, as well as the internal strengths and weaknesses of the company. We will attempt to discover some of the significant changes and events in the external environment that have occurred in the last 5 years and have directly impacted Nike. We will describe how the company adapted and responded to these changes and what the effects of these events were. Also we will identify and describe some of Nike’s internal strengths and weaknesses.
CHANGES AND EVENTS IN THE EXTERNAL ENVIRONMENT INTERNATIONAL CRISES
One of the most recent global environmental changes are the events of September 11th 2001, when airplanes crashed into each of the World Trade Center towers in New York, the Pentagon near Washington, D.C., and near Pittsburgh, P.A. (www.geocities.com/Athens/Acropolis/5232/) U.S. government officials reported that the crashes were a coordinated terrorist attack. Since this catastrophe was not expected, no one was ready to respond to it. Cole Haan store (owned by Nike), located in the World Trade Center plaza has been completely demolished. However, all of approximately 250-260 Nike and Cole Haan employees based in New York are safe and accounted for. In addition, no Nike employees were on board any of the planes involved in the terrorist attacks in New York, Pennsylvania and at the Pentagon. (www.centrum.sk) After closing on Tuesday, September 11th, and Wednesday, September 12th, all other Nike and Cole Haan stores in New York and Washington D.C. are open. (www.nike.com) This disaster affected not only the American people but also the world economy and many areas of business, including Nike Inc. The value of American dollar dropped rapidly and is recovering very slowly. Nike has a large amount of their products in inventory, which they are unable to sell and are preparing to cut down the production.
This would mean a significant downsizing in number of employees. (www.geocities.com/Athens/Acropolis/5232/) Many consumers have reduced their travel to certain retail destinations; in general consumers are purchasing few non-essential products. Nike expects lower sales and profits over the next several months as consumers closely monitor the U.S. attacks on Afghanistan. (www.nike.com) When a military campaign, like the one in Afghanistan, brings new developments or intensifies, U.S. consumers buy less, prompting retailers to become more cautious with their product orders. These events caused a 12 percent decline in shares since September 11th of Nike Inc., the industry’s leader. (www.nike.com) The company said the September 11th attacks on the United States have disrupted most of its long-range strategy plans. Analysts have predicted a modest decrease in quarterly earnings estimates for Nike. They also said they expect fourth-quarter 2001 sales to be hurt by the slowdown in consumer spending.(www.msn.com) Decline and slow recovery of Nike’s stock since Sept. 11th 2001 (www.moneycentral.msn.co.uk)
The company expects to scale back advertising and production next year. (www.nike.com) Nike, as a global company, is now focusing its efforts on assisting in the relief efforts and in heeding President Bush’s directive to regain business as quickly as possible. (www.sme.sk) Both local and national Red Cross agencies have identified immediate financial support as their most critical need. For that reason, the Nike Foundation has been collecting contributions from individual Nike employees and factory partners across the country and throughout the world. Through matching funds, Nike is making a $1 million contribution to the American Red Cross and a variety of other local relief organizations through matching funds of employees and factory partners. In addition, Nike partner factories in Asia, Feng Tay and Pou Chen, have donated $100,000 each to the American Red Cross. (www.nike.com) Nike also is working with relief agencies in New York, Washington D.C. and Pennsylvania to provide donations of Nike products for victims who are affected by these tragic circumstances, as well as for those involved in the rescue and recovery efforts.
These donations include more than 14,000 t-shirts, 11,400 pairs of socks, 1,200 pairs of Nike ACG work boots, 1,000 towels, plus hundreds of pairs of shoes, warm-ups, jackets, sweat shirts and gym bags for rescue workers to store their personal belongings. (www.sme.sk) (www.nike.com) Nike and Niketown New York will continue to coordinate with relief and government agencies and provide as many requested products as possible for fire and rescue personnel. Already, more than $300,000 Nike products have been delivered or are on their way to New York relief agencies. (www.nike.com) Nike US employees participated in a Red Cross blood drive on Sept. 24-25 at its Beaverton-based world headquarters and Oct. 1st and Oct. 5th in its Memphis distribution center location. Nike also has donated money to pat for airtime for two 30-second advertisements to the Red Cross during the Oct. 7 broadcast of the World Cup qualifying match between Team USA and Jamaica on ABC, as well as purchasing space the West 4th wall in Manhattan for advertisements. (www.nike.com) The previous numbers indicate Nike’s response to this huge global change from social as well as from the business point of view.
Nike’s donations as a response to the events of Sept. 11th 2001 Organization Amount Designation American Red Cross $250,000 ($106,000 from Nike employees globally) Relief efforts in NY, Washington, DC, and Pennsylvania PBA Widows and Children’s Police Relief Fund c/o Police Benevolence Association $175,000 Assistance to NY families for burial costs and family survival expenses UFA Widows & Children’s Fund c/o Uniformed Fire Fighters Assn $175,000 Assistance to NY families for burial costs and family survival expenses Federal Employee Education & Assistance Fund $100,000 Assistance to families for burial costs and family survival expenses International Association of Fire Fighters $50,000 Assistance to NY families for burial costs and family survival expenses New York State Fraternal Order of Police “” WTC Fund $50,000 Assistance to NY families for burial costs and family survival expenses Catholic Charities USA $50,000 Immediate counseling and family services for those impacted by NY disasters United Methodist Committee on Relief $50,000 Immediate counseling and family services for those impacted by NY disasters Mercy Corps “” “Comfort for Kids” Project $25,000 Helping children and families in NY and Washington DC Misc. “” contingency fund $75,000 Programs and organizations promoting racial and religious healing and community building efforts Total Reported Cash Donations $1 million (www.nike.com)
As the modern world changes through advances in technology, the global market economy also changes, affecting global businesses such as Nike Inc. Technological changes in the form of machines and mechanical inventions affected the economy during the industrial revolution, but today the advances are more in computer technology. The first computer was produced in the US approximately 50 years ago and was the size of a large room needing its own electric power plant and cost a million dollars to build. This gigantic computer could only do simple calculations. Computers have since decreased greatly in size and cost and increased in productivity and capabilities. In the 1980’s there were big improvements in microprocessors, which allowed for the huge technological advances of the 90’s. Computers are now part of many households and almost every family in the developed world has a computer. The top personal computer now costs between $2500 and $3500 compared to the larger models earlier in the past century. The Internet has also been expanding globally and has changed our world into and global village.
The first version of “the net” was developed in 1969, during the Cold War by the US department of defense as a communication in case of nuclear attack. The net became available in the 1980’s for email and Internet chats, but improvements in HTML in the 1990’s sparked the birth of a new way of communication and business (www.freespace.virgin.net/g.hirst/). A recent survey calculated 120 million users of the net worldwide and numbers are still growing at an enormous rate. The development quick loading and the fast moving Internet attracted people to do more things on the Internet. One of the new advances of the Internet is an E-business. Many people are now ordering goods and services over the Internet. One other use of Internet is also advertisement. Recently, Nike has been trying to find new markets and consumers. One huge innovation to get closer to the customer is through the Internet. The Internet makes information available to people all around the world.
Nike’s web page is designed to entertain the visitor through innovative, colourful graphics; to inform the potential customer of Nike’s activities; and promote and sell their products through the E-shop. The Nike accommodates to the world trend of Internet and shopping over the Internet. They made their own web-shop where visiting customers can easily find the product, which they are looking for. This is a great way to improve future business of the company as Internet business is improving so quickly. It is also important to put a lot of effort and quality into the services offering through the Internet to make a good reputation about the services and name of the company. (www.niketown.com) GOVERNMENT REGULATIONS, LAWS AND TRADE BARRIERS In 1994, the EU commission imposed quotas on certain types of footwear manufactured in China. Special Technology Athletic Footwear, footwear designed for use in sporting activities, met certain technical criteria and footwear having a CIF (cost, insurance and freight) price above 9 EURO’s was excluded from these quotas.
All other footwear produced by Nike falls under the quotas. However Nike feels that the quotas have not material effect on their business. (www.nike.com) In 1995 the EU commission initiated two anti-dumping legislations covering footwear imported from China, Indonesia and Thailand. In 1997 and 1998, the commission imposed definite anti-dumping duties on certain synthetic, textile and leather upper footwear originating from China Indonesia and Thailand. These anti-dumping duties have exclusions for STAF footwear, sports footwear and footwear with the CIF above 5,6 EURO’s. (www.nike.com) This means the anti-dumping duties apply only to low cost footwear, which means that Nike can distribute most products except children shoes and low cost sandals. However Nike shifted the production of these types of footwear to other countries and therefore the anti-dumping duties have not had a material affect on their business. (www.centrum.sk)
If the EU measures become more restrictive Nike recommends that the European subsidiaries consider shifting the production of footwear to other countries in order to maintain competitive pricing. Nike continues to closely monitor international restrictions and maintain a multi-country sourcing strategy and contingency plans. Nike believes that their major competitors are in the similar position. (www.pravda.sk) NEW MARKETS AND CONSUMER TRENDS Revenue for the past three years of Nike’s international (non-US) and US market (www.nikebiz.com) Over the past 4-5 years many new markets have opened for Nike, not only from the geographical point of view and expansions outside the US but also from the customer demand and trends perspective. (www.centrum.sk) As the concept of the global village is becoming reality, more unexploded markets are opening up. Nike divides its global business into four regions: the United States, Europe, Asia Pacific, and the Americas. (www.nike.com) While each region increased revenue in the fiscal year 2001, most of its growth came from the new unexplored markets outside.
In the last seven years, Nike has built many international branch offices and subsidiaries as a response to the changing market. These are located in: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Croatia, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Hungary, Indonesia, India, Ireland, Italy, Japan, Korea, Malaysia, Mexico, New Zealand, The Netherlands, Norway, Peoples’ Republic of China, The Philippines, Poland, Portugal, Singapore, Slovenia, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom and Vietnam. (www.nike.com) Percentage of footwear production in specific countries The European market for athletic footwear and apparel continues to flourish. Every day, new shops open with a commitment to presentation and service that NIKE emphasizes. Nike feels the emotional connection growing in Europe is similar to the one NIKE created in the U.S. 20 years ago. (www.nike.com) Nike’s Asian market is very profitable but also very demanding one. This market depends on authentic sports positioning and the ability to deliver technology-based performance products. Nike’s attempt to fulfill these criteria has so far been very successful.
Nike is especially enthusiastic about the World Cup coming to Japan and Korea in 2002. They hope this will provide them with a great opportunity to influence their soccer success in Asia. (www.nike.com) The most competitive and developed market in the world for Nike is the USA. Revenues in this market grow at two percent per year. Although Nike has been struggling in some areas of this market, it continues to lead the athletic footwear market in share and product innovation. Apparel in the U.S. is slowly making its way back to the market after couple of tough quarters in the past 2 years. U.S. Apparel is currently up 9% in revenue for the year and is starting to stabilize in the second half of fiscal 2001. (www.nike.com) Changes that have occurred in customer demand are directly proportional to the present trends of people.
According to recent researches, American kids have only 25 percent of their daily life considered as “free time,” compared to about 40 percent in 1981. (www.nike.com) For a sports company this means less demand for leisure time clothes, footwear and equipment. According to statistics, athletic footwear sales have shown a decrease in the third quarter. This fact represents back-to-school sales, indicating less interest by the crucial teenage market as it moves toward different looks in the footwear area. This may be explained by an overall shift of interest and fashion in this market from sports toward entertainment, music, and celebrities.
A recent trend in the athletic footwear business shows that several of the large corporations are losing market share due to the declining sales in traditional markets. As aerobics, fitness and cross training markets decline there is a shift to non-traditional sports. By 1998, the publicity for a market in brown shoes had passed. Brown shoes never impacted the athletic footwear market as predicted. Instead, hiking, off-trail and fashion footwear continue to show strong growth, with many athletic footwear companies expanding into those areas. (www.nike.com) It is predicted that the market for athletic footwear has peaked and is now declining and leveling off at a production level of about 300 million pairs. Fashion driven spikes often occur, such as in 1995 where a production level of 345 million pairs was reached.
This is viewed as a bonus for the industry. (www.nike.com) Retailers will thrive at the 300 million pair a year production level by working with retailers to consolidate store locations, manage inventories and maximize sell-through. The continued trend over the last five years is the consumers’ willingness to pay, on average, higher prices for athletic footwear. (www.proquest.com)
IMPORTANT FINANCIAL EVENTS
The financial interactions between countries and governments affect the profits of the large corporations such as Nike and the retail values of their products. In North America transactions are often measured in US dollars. This common currency makes transactions easier between countries. In the European Union, 15 different countries must convert their different currencies when doing business with other countries. This often accounts for increased retail prices in international goods and services.
On January 1st 1999, 11 of the 15 members countries of the European Union established permanent conversion rates between their existing currencies and the new EURO, the new common currency of the European union. Until the end of the transition period, public and private parties may pay for goods and services using the countries original currency or the EURO. Starting January 2002, the EURO will be the official currency of the EU and the original currencies will be completely withdrawn from circulation by June 30th 2002. (www.nike.com) Since January 1998 Nike has been researching the complications and affects of the transitions to the EURO. Nike’s devoted project team has made modifications to inform technology systems supporting the market, management, invoicing, pay roles and cash management functions in order to make their conversion smooth.
Nike believes that the introduction of the EURO will eliminate inequalities in exchange rates between countries although differences in cost between countries and different tax rates will still affect price differences at the retail level. Over the past three years Nike has been actively working to asses and adjust a practices in pricing to operate effectively under this new currency. (www.nike.com) The cost of adapting Nike’s systems and practices to the use of the EURO total approximately 8 millions US dollars and was generally related to the modification of their existing systems. Nike also believes that the change of currency will not have an impact on the financial conditions of results of operation. (www.nikebiz.com)
INTERNAL STRENGTHS AND WEAKNESSES STRENGTHS
Decision Making Nike’s strongest weapon is decision-making. Their managerial team has been able to make decisions specific to their needs and although not all the time, most of the time they were right. They combined rationality, intuition and experience to come up with the best decisions ever made in this market. To prove the above, we can just look at some of their well-known choices made in the past. Nike managers decided to rely on globalization and externalization of risk through wholly or partly-owned subsidiaries. (www.nike.com) The fact that they have subsidiaries all over the world helps them to become more flexible and partially getting rid of potential risk. Their flexibility is proved by the diversity of sports areas they are involved in, which has also turned out to be a great decision since Nike is dominating most of these markets. (www.nike.com) This company is able to manufacture products for a dozen of different sports and still keep the top quality in all of them. From the start, the managers of Nike decided to count on customer satisfaction and total quality of their products, realizing the social expectations that lied upon their shoulders.
They have believed that quality outweighs the extra amount of money spent on manufacturing of the best products on the market. One of the most important decisions of Nike’s management was advertising. They spent large amounts of money on commercials, which have in the long term paid back in multiples. They have used famous athletes to promote their brand, which is considered a great strategic plan. Also they decided to involve in various social activities. Their extraordinary advertising has helped them to develop the well-known image they have. (www.msn.com) The owners of the company visualized, gave the company a form, set their goals and then they tried to achieve them.
They hired the right personnel and they motivated them by generally higher wages than their competitors were offering. They also involved their employees in initiating and implementing change. According to these employees, Nike allowed them to gain self confidence, express their creativity, and involve in making decisions that need not only the expertise of a manager but also an experience of a worker. (www.nike.com) Looking at the present results of Nike’s decisions, this kind of empowerment has shown to be a great choice.
Research and Development Efforts Nike believes that the key factor of its success originates from their research and development efforts. (www.nike.com) They emphasize the technical innovation in the design of their products to achieve their manufacturing goals, which are to create products capable of reducing injury, increasing athletes’ performance and maximizing comfort. Of course, Nike pays a lot of attention to their products’ design respectively to the present trends. (www.sgma.com) Since these criteria require a specific expertise, recruitment is one of the most important managerial issues of Nike. Looking at their past, we have to admit that they have succeeded in this with excellence. Nike has own staff of specialists in the areas of biomechanics, exercise physiology, engineering, industrial design and others. They also have committees specialized on research and advisory.
These committees are made of top-level athletes, coaches, trainers, equipment managers, orthopedics, podiatrists and other experts. (www.nike.com) These people use their expertise and experience to help Nike on its way to improvement. They help them to develop new better products and improve upon present products. They also consult the company about designs, materials, and concept for product improvement. Athletes hired or sponsored by Nike test-prove the company’s products during the development process. These facts are strongly held within the company and Nike is proud to include them in their reports (www.nikebiz.com).
Ability To Respond And Adapt To Changes Since Nike is a consumer products company, the demand for their products highly depends on popularity of different sports and activities and the changing trends. Therefore they should be able to respond to these changes in costumer preferences and quickly adapt to them. This company must adjust their existing products, develop new ones, and create styles that are specific to the trends. (www.sgma.com) They also have to make an effort to influence sports and fitness preferences through aggressive marketing. This kind of environment is very unstable and puts one against many different sources of risk. If you fail to react quickly to such changes it will show up on your sales and profits reports. Since Nike has been occupying the top of the sports equipment manufacturers chart for a long time they are getting used to their strategies, which are now becoming habits. (www.nike.com) This may be very useful in some cases but according to analysts, over time, organizations develop and lock into ways of doing business, in spite of changing conditions.
Nike’s strategy has been to dominate only the markets that are relatively safe and tend to be very profitable since it has become the world’s leader in this market. (www.nike.com) Despite their great decision making abilities this has turned out to be a very poor choice. For example, Nike did not respond to the growing market of aerobics and fitness training because it seemed too small to be worth that much attention. (www.sgma.com) However, Reebok developed a line of aerobics and fitness equipment which has met a lot of popularity among the customers. Since then, Reebok has been leading this market, which is currently the area of their main interest. (www.sgma.com) This was an example of a slow response to environmental changes. However, there are areas where Nike responded quickly and still was not quite successful. For example, soccer is currently the number 1 sport in the world and is currently dominated by the brand Adidas. (www.fisonline.com)
Even though Nike soccer equipment qualitatively meets the Adidas products, Nike has not been able to take over this market. So what was wrong with their reaction? To dominate such a large market you have to be more aggressive and be able to gain customers attention. (www.sgma.com) Nike’s “failure” in the soccer market is generally seen as the lack of interest, aggressivity and creativity in this area of business. (www.referaty.sk) Growth Company That Has Not Grown Fiscal year 2001 was an above average year for Nike. However, it was not great even though they finished hard in the fourth quarter. This year was fairly similar to the last four years. During that time Nike has been a growth company that has not grown. Until the end of the fiscal year 1997 everything was going great for Nike. From 1994 to 1997 this company went from being a strong company with growing market share and $3 billion in revenues to one with dominant market share and revenues over $9 billion. (www.nike.com) Everything seemed to be going perfect for Nike, they were successful in everything they touched and they were growing rapidly. At the end of the fiscal year 1997 they found themselves in a position where employees were euphoric, but overworked since there was not enough of them.
To keep this enthusiasm going they hired more people and continued on their path to becoming a truly global company. (www.sgma.com) Since they realized that this couldn’t be accomplished over few years they were trying to be the best at everything they were doing as well as building a strong team for the future. (www.nike.com) This was exactly the point where their growth has frozen and never started again. They penetrated new markets successfully, but were not able to keep up the standards they had set before. They focused on new areas of business so much that they forgot to do the old simple things right. (www.sgma.com) Despite all these efforts the industry was standing still. There were different reasons for this such as the U.S. market hitting the recession point, Nike launching a massive 3-year supply chain overhaul and the tough period in the Asian economy. (www.nike.com) The U.S. market recession point was well expected since this market had grown so fast. Nike launching the massive 3-year supply chain overhaul, which was well in advance of the competition, was not a productive strategy in short-term but its benefits are supposed to show up in the fiscal year 2002. (www.nike.com) Lastly the downside of the Asian economy was also predictable since this is a market with big turnovers and risks. However, it was not expected to influence Nike as much as it did.
Great companies are able to deal with such events and keep on growing. Nike managers did not pay enough attention to these facts and that was the main reason of their growth halt. (www.sgma.com) Even though Nike is currently growing in some areas of market, such as Europe, Asia, Latin America and the soccer and golf markets, overall they are standing still. (www.nike.com) Year 2001 is the proof of the above. In this year Nike forgot to compete mid- and low-priced footwear in the U.S. and they were not able to match their orders and production well, in which they were very successful in the past. Now, Nike has to face a big decision. They can accept the problems they have and let their business go slowly down, or keep excelling in some things, be average in others and stay at the point where they are now. However, the best choice for Nike would be to find the solutions to their problems and start growing again. (www.msn.com) (www.sgma.com)
Nike’s environment is very unstable and exposures companies to unexpected risks. Generally, Nike has been able to respond to these changes (except few exceptions) by their creativity and flexibility. This company tries to prevent a direct impact of these changes on them by externalizing risk. Despite these facts, Nike’s expansion is not as significant as it is expected to be. This is caused by some of their internal weakness and external changes. However, they still remain number 1 in the world footwear market. (Company Profiles For Students)
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