Strategic Leadership of Nike

To enhance corporate leadership, Nike has established Strategic Leadership Team, chaired by CEO Mark Parker. This team is responsible for directing NIKE, Inc.'s mid- and long-term strategy. Strategic leadership of Nike is based on the principles of heterogeneous top management team and evenly distributed powers among top management. NIKE, Inc.'s Board of Directors is responsible for corporate governance in compliance with the U.S. Sarbanes-Oxley Act and other laws, and representing the interests of shareholders. As of November 19, 2009, the board was composed of 13 members, 11 of whom are considered independent, non-executive directors under the listing standards of the New York Stock Exchange. As is obvious Nike encourages outsiders to become part of board, in order to avoid bias connected with “corporate conformism”. Having board members assigned from heterogeneous backgrounds makes Nike’s corporate leadership very successful.

Corporate responsibility and organizational culture are crucial elements of successful Strategic leadership. The Corporate Responsibility Committee of the Board of Directors was established in 2001 to review significant policies and activities and make recommendations regarding labor and environmental practices, community affairs, charitable and foundation activities, diversity and equal opportunity, and environmental and sustainability initiatives. Either the company chairman or the chief executive officer attends the Corporate Responsibility Committee meetings.

NIKE, Inc. has a code of ethics for all employees called Inside the Lines. It defines the standards of conduct company expect employees to follow and includes a range of topics on employee activity, ethical behavior, product safety, legal compliance, competition and use of resources.

Each year, all NIKE, Inc. employees are required to verify that they have read and understand Inside the Liness. NIKE, Inc. also operates a global toll-free AlertLine for employees to confidentially report any suspected violations of the law or code of ethics. Any reported concerns around accounting, auditing or internal control are communicated to the Board's audit committee, which determines appropriate action.

In order to enhance innovation and support corporate traditions Nike uses both internal as well as external managerial labor market for employment. As already mentioned many of board members are outsiders on the other hand board member Jeanne Jackson, who also served on the CR Committee, stepped down from the Board in late FY09 to become an executive of NIKE, Inc.

Cooperation Strategy of Nike

           To achieve successful growth, companies use three means of cooperative strategy – internal development, mergers and acquisitions and cooperation. Nike uses all of the mentioned approaches. In previous blogs I was discussing internal development and acquisition strategy. It is interesting to define cooperative strategy of Nike. Strategic alliance is primary source of business and corporate level cooperation strategy of Nike. There are 3 types of strategic alliances – joint venture, equity strategic alliance and nonequity strategic alliance. Nike successfully exploits all three types of strategy.

            The example of joint venture alliance is deal according to which new audio sport producer company was established. In 2002, “Royal Philips Electronics, Europe's largest maker of consumer electronics, and Nike, the world's leading maker of athletic shoes, said today that they had signed an agreement to develop audio sports products”(The new York Times) Using advantage of joint venture, Nike managed to establish new dimension of its product while cooperating with Philips and sharing entrepreneurial  risks with the partner.

            Nike also uses nonequity strategic cooperation with Apple. “NEW YORK—May 23, 2006—Nike and Apple today announced a partnership bringing the worlds of sports and music together like never before with the launch of innovative Nike+iPod products. The first product developed through this partnership is the Nike+iPod Sport Kit, a wireless system that allows Nike+ footwear to talk with your iPod nano to connect you to the ultimate personal running and workout experience”( http://www.apple.com/pr/library/2006/may/23nike.html) As a result, companies share their unique resources and capabilities to create cooperative competitive advantage.

Nike Inc. has equity strategic alliances, each of them bordering on multiple locations around the world; Nike's factory locations are divided across the overseas based on the technological achievements of those chosen facilities. South Korea, Japan, Taiwan, Hong Kong, Philippines, Thailand, China, Malaysia, Indonesia, Yugoslavia are important destinations. Nike coordinates efforts in designing shoes using technology in countries such as South Korea, Japan, Taiwan, and Hong Kong (producing 10,000 pairs of shoes per day) while less developed countries such as Malaysia, Indonesia, Thailand, and Philippines produce the generic casual line of shoes. Most of above mentioned destinations have strict governmental regulations requiring to have local partner when starting new plant. For example Chinese government requires that government owns certain percentage share in new business. Consequently major plants of Nike are either entirely outsourced or established on the bases of equity strategic alliance.

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. 

Nike Business Level Strategy

To distinguish its brand and increase customer loyalty, Nike uses differentiation business level strategy. It offers high quality goods and acceptable price. Nike is perceived as something “fancy”, in terms of sport goods manufacturer.

The company segments its products in different ways. First of all, it manufactures sports goods and accessories for three different Demographics: men, women and children. Each segment is carefully examined in terms of physical capabilities, sociological needs, and design preference. Along with business level strategy it should be mentioned that Nike uses strong diversification (Corporate level strategy) to support its product differentiation. These products create value and increase customer satisfaction: Apparel, accessories, such as Nike watches or gym bags, as well as performance equipment, including sport balls, timepieces, eyewear, skates, bats, gloves etc. Nike produces goods for every type of major sports: running, basketball, tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling, cheerleading, aquatic activities, hiking, fencing etc. Such wide variety of goods is an attempt of Nike to increase “Affiliation” dimension. Nike constantly looks what could be added to current product range to increase customer satisfaction and strengthen the links between company and client.

Major advantage of manufacturing a number of product lines is the reduction of risk. In such multiproduct portfolio, if one product is not successful, there are numerous others to compensate this risk. Besides just offering differentiated goods, Nike also adds value with the opportunity for customization.

NIKE designs most of its footwear for athletic use; however, in order to diversify its products, a large percentage of their products come from sales of footwear, apparel, and accessories for casual and leisure purposes. It targets the clients who can afford higher price compared to the products which are positioned using cost-leadership strategy. Major reason to pay higher price is the brand itself, and all perceived benefits that are firmly connected with having Nike.

Besides the two segmentations described above, NIKE also has agreements for licensees to produce and sell NIKE brand items aside from athletic footwear and apparel. In part, this product differentiation is accomplished through strategic management planning by having the company sell NIKE brand timepieces, children’s clothing, school supplies, electronic media devices, and other items. Using such strategy Nike increases firm’s access and connection to customers – the “reach” dimension.

According to Nike Annual Report, company will maintain high quality and acceptable price as major strategy for growth. “We have shared information on the company’s growth strategy, including our aim to achieve revenue of $23 billion by FY11. This strategy is the context for our corporate responsibility efforts. We aim to achieve this growth by delivering premium products, growing in our geographic regions and elevating the retail experience”.

Nike and Outsourcing

      Sport goods producer companies have two options for manufacturing their products. They can own and operate the factories, or look for the ways of outsourcing. Facilities that are enough efficient for outsourcing, could be located either domestically or internationally. Outsourcing to domestic firms (US) gives advantage of easy monitoring, skilled workforce, well understood labor rules, but on the other hand it is relatively expensive if compared with outsource in developing countries. By manufacturing products overseas, in the third world economies, tremendous efficiencies are gained because of low salary expense, but in this case company has to face increased difficulty of monitoring the quality of their products and the uncontrolled working conditions in the factories.

      Nike uses outsourcing strategy, using only subcontractors throughout the globe. It currently owns a 47% market share of the domestic footwear industry, with sales of $3.77 billion. Nike has been manufacturing throughout the Asian region for over twenty-five years, and there are over 500,000 people working for Nike. Vast majority of production comes from China, Indonesia, Vietnam, Philippines, Taiwan, and South Korea. Factories in these countries are owned by subcontractors, with the majority of their output consisting solely of Nike products. 

        To avoid pressure from customers and legal cases against the company, Nike employ teams of four expatriates per each of the big three countries (China, Indonesia, Vietnam), that focus on both quality of product and quality of working conditions, visiting the factories weekly. They also developed their code of conduct in 1992 and have implemented it across the globe. Its goal is to set the standard for subcontractors to follow. However, company still faces problems with executing code of conduct because most of the factories are owned not by the company, but by subcontractors. Factory conditions and human rights issues have been widely criticized by different pressure groups. Even though company responded these issues with Andrew Young report, the Dartmouth Study, and Ernst & Young’s continual monitoring, Nike still needs couple years to eradicate mentioned problems.