Nike & Acquisitions

Nike Inc. Chief Executive Officer Mark Parker said the world’s largest maker of athletic shoes will pursue acquisitions and partnerships as it goes after the growing middle class in developing markets such as China. Annual revenue will climb 41 percent by 2015, also helped by store openings and the expansion of existing product lines, executives said. The company will look to build brands like Converse and Umbro.

China is the company’s biggest growth opportunity, said Willem Haitink, vice president of the Nike brand in greater China. It accounted for 9.7 percent of Nike’s revenue in the third quarter ended Feb. 28, and helped the company post its first sales growth in five quarters. The country’s economy grew 8.7 percent last year, compared with a 2.4 percent contraction in the U.S.

Among various deals, Converse is one of the most important acquisitions. It is the fourth of Nike's biggest wholly owned subsidiaries, joining Bauer Nike Hockey, Cole Haan and Hurley International.

As management claims "Converse brand brings broader access to a broader consumer base, increasing our ability to reach consumers at all levels. It's definitely a complement to our product offering."

It is important to mention that Nike Management prefers horizontal and related acquisition. Such strategy enables company to target different customer preferences diversify product failure risks and of course increase the profits. "While there is a lot of growth in the Nike brand, we also want to grow Nike Inc.'s portfolio," said Joani Komlos, Nike spokeswoman. Nike as gigantic sport goods manufacturer already established very challenging entry barriers for new comers. Nike’s increased market power also threatens its major competitors, which have to be very careful in competitive rivalry not to lose the market share to Nike.

Even though Nike actively spends funds for acquiring businesses there is a chance that after some time acquisition strategy wouldn’t be as successful as they are right now. Such rapid growth may cause difficulties with synergy, decrease efficiency of management and as a result affect the profitability. Simply, company becomes too large and loses flexibility which is so important for successful operation in global environment.

 

Diversification Strategy of Nike

It is very interesting to discuss corporate level strategy of Nike. Diversification is major tool of corporate level strategies. Accordingly, there are different levels of diversification. Nike products are the typical example moderate-high, related constrained diversification. It means that around 70% of revenues come from major business fields, all businesses share product, technological, and distribution linkages. Indeed, nike has its major products that yield biggest share of income: Apparel and shoes. However there are numerous different products which constitute around 35 % of company income. For dominant and minor products company uses same distribution channels, technological and other resources. As Nike annual report describes “Our 40% of our sales come from athletic apparel, sports equipment, and subsidiary ventures. Nike maintains traditional and non-traditional distribution channels in more than 100 countries targeting its primary market regions: United States, Europe, Asia Pacific, and the Americas (not including the United States). We utilize over 20,000 retailers, Nike factory stores, Nike stores, NikeTowns, Cole Haan stores, and internet-based Web sites to sell our sports and leisure products.

As management describes in annual rapport “Our primary product focus is athletic footwear designed for specific-sport and/or leisure use(s). We also sell athletic apparel carrying the same trademarks and brand names as many of our footwear lines. Among our newer product offerings, we sell a line of performance equipment under the Nike brand name that includes sport balls, timepieces, eyewear, skates, bats, and other equipment designed for sports activities. In addition, we utilize the following wholly-owned subsidiaries to sell additional sports-related merchandise and raw materials: Cole Haan Holdings Inc., Nike Team Sports, Inc., Nike IHM, Inc., and Bauer Nike Hockey Inc.

Our most popular product categories include the following:

• Running

• Basketball

• Cross-Training

• Outdoor Activities

• Tennis

• Golf

• Soccer

• Baseball

• Football

• Bicycling

• Volleyball

• Wrestling

• Cheerleading

• Aquatic Activities

• Auto Racing

• Other athletic and recreational uses”

Besides product diversification Nike must pay close attention to manufacturing and supply chain diversification as well. Global economic crisis and uncertainties increased importance of such diversification. NIKE depends heavily on Strategic Outsourcing. Virtually all footwear products are produced outside the United States. There were seven contract suppliers outside the US that manufactured NIKE brand footwear in 2003. China, Indonesia, Vietnam, and Thailand manufactured 38%, 27%, 18% and 16% of total NIKE footwear respectively. In FY2003, only approximately 1% of total NIKE brand apparel was manufactured in the US. Independent contractors located in 35 countries manufactured the remainder. Such manufacturing strategy enables Nike to get the best deals and decrease risks.

Supplier diversity is a very important part of a successful business and since NIKE’s customers are on a worldwide scale, the company needs as broad a base of suppliers as possible to actively and significantly reflect the world in which it operates. NIKE relies heavily on its supplier relationships to help the company arrive at innovative and creative solutions, to understand its business, and to help it reach its goals. Furthermore, with such a large and diverse supplier base, NIKE is able to have a strong presence in the markets it operates, and it has a solid brand name that is recognizable worldwide, with strong credibility.

Competetive Dynamics

Nike is a very competitive organization. Phil Knight (Founder and CEO) describes Nike operation as “Business - the war without bullets”. Nike Competitive rivalry is very intense. Company tries to maintain leadership positions so it has to respond to competitor decisions quickly and effectively. At the Atlanta Olympics, Reebok went to the expense of sponsoring the games. Nike did not. However Nike sponsored the top athletes and gained valuable coverage.

Nike and its major competitors operate in Fast-Cycle market. Companies’ innovations are not shielded from imitation and usually imitation is inexpensive and easy. For example Nike Air was soon imitated by all leading manufacturers of sport shoes. Consequently it is impossible to develop sustainable competitive advantage and companies have to deal with rivalry every time. 

Market commonality and resource similarity make competitive process more difficult. The fact that all major sport goods producers compete in different niches,  results in high market commonality, which makes innovation process more difficult and shot lasting. Because resource similarity is also strong between Nike and its competitors companies are easily aware about each others’ strengths and weaknesses.

The athletic footwear industry is competitive and mature market. Companies which compete in this niche are knowledgeable about explicit trends of customer decision-making. Market leaders like Nike, Adidas and Reebok have made the industry what it is today. Consequently, those companies who couldn’t gain competitive advantage like Saucony and K-Swiss have been struggling for years just to keep their brands alive. This cutthroat environment has drastically reduced desire of new companies to enter sport apparel or sport shoe market.

Even though above mentioned niche is lucrative lure, there are very few companies which could take risk and step in the waters of uncertainty and risk. Major actors’ reputation, their strong brand value and diversified products threaten new entrants. However “big fish” like Nike or Adidas would not respond aggressively to small company which may enter the market. Main reason is that small new entrants don’t carry significant risk for Nike market share, so responding against new entrants with aggressive steps may loosen focus on major competitors. Consequently Nike tries to keep an eye at big players.

Economies of scale also contribute to the lack of newcomers into this market. In order to have an edge over the leaders, companies must be able to compete at all levels such as reasonable pricing, efficient production, and high product quality. These things are difficult to achieve without the resources of an established manufacturer.

Another key barrier to entry is the access of traditional distribution channels. When combing the shelves at stores like Sports Authority and FootLocker, it is evident that the leaders dominate the shelves. Lesser-known brands are viewed by retailers as being too risky to replace an established brand name like Nike or Reebok on the shelf.

All above mentioned explains the complexity of Nike competitive dynamics.