Strategic review of nike inc and its trademarks
The Nike swoosh is one of the most recognizable trademarks in the world. The company itself has experienced an unrivaled growth from its beginnings in the 1960s. This report profiles the sporting goods industry, describes Nikes current position and outlines possible growth strategies.
Over the last few years, despite soaring profits, Nike has experienced slower revenue growth than their main rivals. The lackluster growth is both due to slowing sales in mature markets but also attributable to the success of Nikes competitors. Nikes ability to deliver higher profit margins indicates that there is not a cost issue but that they should rather focus on increased top line.
Achieving top line growth for a large company like Nike is a considerable challenge. A growth rate rivaling their competitors is not going to come from one single initiative but rather several coordinated efforts. In mature markets Nike could leverage their strength in design and innovation to enter new sports like winter sports and cycling. In emerging markets Nike should grow their presence by increasing the consumers’ desire for Nike product through delivering on their brand promise. In these new markets there would also be room for a Nike to sell products at a lower price point than they are doing currently.
Our strategic recommendations are summarized as follows:
Achieve growth in mature markets by extending its product portfolio and continued incorporation of technology to its product lines.
Extend its sports offering in the injury and recovery segments as a complimentary product offering.
In emerging markets, Nike should look at targeting the lower price segments by launching a sub-brand. These markets are driven more by value hence product offerings need to span across price points.
Expand corporate responsibility initiatives to protect Nike’s brand image through recognizing the worker’s right to form trade unions, devising a confidential complaints mechanism and focus on long-term contracts.
Nike should put greater emphasis and direct more investment into customized product offerings such as NikeId and capitalize on this market’s trend for more personalized products.
In emerging markets, Nike should look at selling through other value retail formats under different brand name to capture the more value driven segments of the market.
Table of Contents
During the June 2010 board meeting, Charlie Denson, president of Nike Brands, was heavily criticized by the boardroom for his proposed strategic reorganization. The board was not impressed with the overall direction made by Nike Brands and asked Charlie to come back in a few weeks with an updated strategic review. This report forms part of Charlie’s review and revised recommendations.
Market Overview and Nike's Position
Discussion of the market and Nike’s position within this market is structured in terms of the simplified value chain, competition, mature vs. emerging markets and financial position.
Simplified Value Chain
Nike started out as an athletic shoes company but has since expanded into athletic apparel and sports equipment, venturing into a number of core sport categories. Figure illustrates a simplified value chain for the sports footwear, apparel and accessories industry.
Design and develop – is tasked with designing and developing new products.
Supply – involves manufacturing and distribution of products.
Sell – comprises channels of distribution and branding.
Figure Simplified value chain for sports footwear, apparel and accessories industry
Design and Development
Successful sports footwear, apparel, and accessories companies differ from their competitors in that they focus on both seasonal trends and the development of new products. Example of the former is the redesign of the standard sneaker, while “Nike Dri-Fit” clothing is an example of the latter. The design and development of new products is key to the success of a company in this industry.
One of Nike’s strengths is its insight into customer needs (e.g. Nike for women). This result from Nike’s investment in marketing research conducted on a continual basis to maintain the company’s leadership position in the industry.
Nike has recently partnered with other firms to develop new products. A good example is the Nike+iPod, a device for measuring distance and speed when running, which was developed with Apple Computers.
Supply to Customer
In contrast to design and development, the supply to customers (i.e. manufacturing and distribution) within the industry, is heavily outsourced. The recent focus for industry leaders has been cost cutting whilst maintaining quality. This approach has led to a close collaboration between design firms and manufacturing companies.
The increasing competition and globalization of manufacturing operations mitigates the risk of losing their supply. Another advantage to a global manufacturing approach is that products can be produced closer to its target market. This way companies can save on transportation costs and manage inventory requirements more effectively.
Some companies within the industry have found downsides to a hands-off approach to outsourcing in terms of their control of labour standards. This issue has recently caused significant damage to the public image of some major firms. In response to this, companies have focused on controlling the supply chain by reducing the number of manufacturers. Companies have also sought to increase their corporate social responsibility to counteract negative brand image.
Nike outsources its manufacturing so it can focus on core competencies of design and development, distribution and marketing. The special relationships that Nike has formed with some of its suppliers has lead them sharing knowledge of customers, technology and new designs. This ensures that Nike maintains high quality and workmanship.
Companies in this industry rely on a number of distribution channels:
Branded stores- often as “flagship” stores, these capital intensive channels are used to both showcase products and increase brand awareness.
Retail accounts- the products are sold through independent sports stores.
Online stores- this channel is not dominate for most companies in the industry
The branding of firms in this industry varies across companies. Global brands typically spend significant amounts of money on endorsements of top athletes and teams. Nike has, in many ways, revolutionized marketing to the benefit of its success (see Appendix C- SWOT Analysis). Nike has positioned itself as a high-end-brand, selling well-designed and innovative products. The company attracts customers through a marketing strategy around the brand image which consists of the distinctive swoosh logo and its advertising slogan (“Just do it”).
Nike employs a mix of marketing strategies to promote its products. These include:
Successful TV advertising campaigns through its partnership with Wieden & Kennedy advertising agency. Nike has won “advertiser of the year” twice at the Cannes Advertising Festival. It also won the Emmy Award twice for best commercial.
Sponsorship of top athletes to promote and advertise the latest design and technology offered by NikeId. Sponsored athletes include Tiger Woods, Michael Jordan, Lance Armstrong, Roger Federer, etc. Nike is also the official sponsor for the Indian cricket team as well as national soccer teams of Brazil, Portugal, Netherlands, etc.
Nike has had huge success in developing a market in China. Sales are rising at 66% per year and Nike is opening an average of 1.5 new retail accounts a day. Nike’s strategy in entering was smart because it didn't enter China selling usefulness, but selling status. The company promoted the right sports (e.g. basketball) and launched a series of inspiring advertising campaigns. This strategy was implemented as China's new middle class was developing a hunger for Western brands and the individualism that Nike represents.
As shown in Appendix A - Porters 5 Forces the industry has high entry barriers in the form of capital requirements and access to distribution channels. Despite this there are several smaller players who operate locally in each market in addition to the large global companies like Nike and Adidas.
Since the manufacturing of products is largely outsourced, companies in this industry have to compete based on design, innovation of products and image to avoid having the market deteriorate into a pure price war. Consumers associate themselves with a particular brand and tend to stick with the brand with which they are comfortable. Entry to the industry is difficult as brand loyalties are high.
In the lower segments of the market there is competition on price but for the global companies price is only one factor together with quality and design. Further there is competition in terms of distribution channels, but most of the large sports stores will have accounts with all the global suppliers.
Nike’s products fall into two major categories, namely the footwear and apparel segments.
The global footwear market has shown positive growth in recent years. According to industry trends, the global footwear market is expected to be around 13,900 million pairs corresponding to a value of $192,400 million in 2010 (DataMonitor, 2009). The US continues to lead the global footwear market, with about a third of dollar demand coming from the region.
The footwear market is a collection of smaller, segmented, yet often overlapping markets, defined by both the price and the purpose of the shoes (see Figure 2). The greatest overlap between these categories is between performance shoes and casual wear.
Tufts University, 2006
Figure Athletic Footwear Industry Market Shares 2006
There are only a few firms who compete in almost every sector of the market namely Nike, Adidas, Reebok, and New Balance. Smaller firms usually specialize in particular types of shoes (see Table 1).
Footwear Brand / Type of Footwearuser2010-07-30T10:48:00
Change to picture
Stride Rite Corp
Table Competitors and Shoe types (Van Dusen, 1998)
The US athletic apparel market is the world's largest athletic apparel market, accounting for 41% of total sales. However, this industry is becoming increasingly globalized and competitive.
Competition is most obvious among the sportswear brands that control a majority of the share of this market (seeFigure Figure ). These companies spend heavily on innovation and sponsorship, which act as entry barriers for new players.
Figure Global Market Shares Athletic Apparel
In mature markets, a decrease in participation in sporting activities has threatened the industry  . Consumers who are concerned with keeping fit and healthy will help drive revenue growth.
Success in the sports apparel industry relies mainly on innovations and creativity. The primary consideration is no longer production cost per unit, but quality, continuous creativity and responsiveness to the market. Companies pay close attention to perceived consumer needs, alter designs to enhance fashion appeal, and use branding to project a specific product image.
Mature vs. Emerging Markets
Realizing the difficulty in achieving continued high growth within mature markets, many global companies are focusing on developing operations in emerging markets. Nike has gained significant advantage from their early entry into the Chinese market. This section deals with characteristics in both markets.
The demand in mature markets of the United States, Europe and Japan has stagnated, changing management focus from managing supply to managing demand. Not only is there little room for a new company to produce the same products, but there is little opportunity for growth without new product innovation.
As the market leader, Nike has little room to expand and concentrates more on maintaining market share. Nike has expanded its product offering and competes with other sport shoe and apparel companies as well as other urban fashion companies. An increase in market share by any competitor can result in Nike experiencing loss of market shareuser2010-07-30T11:12:00
During the GFC Nike struggled with declining revenues in mature markets as consumers reduced discretionary spending. This has driven Nike to focus on growth in emerging markets where over 70 percent of the company's future growth is predicted to come from (source).
In many parts of the developing world there is a growing middle class. Many consumers within this segment now have the disposable income to spend on high value athletic footwear, apparel and accessories. These consumers are also influenced by Western culture and its values. Having the ability to purchase products gives them a perception of higher social status. The challenge for firms entering emerging markets is to create products which link brand knowledge with specific cultural elements.
An analysis of Nike’s 5 largest global competitors’ (Adidas, Puma, Asics, Skechers and Li Ning) financial data was used to demonstrate Nike’s current financial position. Figure Revenue $ Million and Figure illustrate annual revenue and net incomes of Nike and the other five competitors’ between 1999 and 2010. It demonstrates Nike’s dominant position in the market in terms of sales and profit.
Figure Revenue $ Million
Figure Net Income $ Million
However, over the past five years Nike’s revenue grew at an annual average rate of 6.8% which is the lowest among its major competitors (Figure ). Despite the lowest revenue growth rate, Nike has been able to maintain a competitive and steady profit margin and return on capital (Figure and Figure ) during the same period. The high return on equity also reflected in Nike’s outperforming share price.
Figure Annual sales growth in per cent
Figure Profitability Comparison 2009
Figure Profitability Comparison 2005-09 Average
From the operating side (Figure and Figure ), Nike’s gross margin is in the middle among its competitors. This reflects a moderate cost strategy on inventory and supply chain management. However, Nike has the lowest Selling, General & Admin (SGA) expenses margin which drive the high profit margin and this allows Nike to outperform other competitors. Low SGA cost is also in line with the outstanding employee efficiency since Nike has the highest sales per employee compared to major competitors over the past five years.
The balance sheet reveals Nike’s strong financial position with total net debt to equity significantly lower than competitors’ average (Appendix B Figure ). The current ratio is also in the highest range above 3 (Appendix B Figure ). By the end of May 2010 Nike has $5.1 billion (35.6% of total assets) worth of cash and marketable securities with only $591 million outstanding debts on the company’s account (Appendix B Figure ). The average free cash inflow over the past five years is more than twice of the second largest competitor – Adidas.
To summarize, over the past five years Nike has maintained a robust and stable financial performance in comparison to the industry. However, that Nike has the lowest revenue growth rate among major competitors may be a concern for company’s future outlook. In addition, the strong cash inflow and excessive cash position may indicate a chance to invest in future opportunities to achieve a goal of constant growth both in sales and profit.
This section addresses Nike’s current strategy to achieving its goals. The discussion is based around the simplified value chain, but also ties in with the Strategy Map (Appendix D).
Design and Development
The overwhelming message from the presentation of Eric Sprunk, Vice President of Global Product and Merchandising, at the Nike Investor Meeting in May this year, was that innovation in design and development defines the Nike brand. “Innovative product fuels our growth in footwear. It drives product excellence in apparel as a basis for accelerating our apparel business, and it's a key driver to ensure that our growth is increasingly more and more profitable”  . Nike’s innovations in the design and development of product are multi-dimensional: digital innovation, products design for individual customization and the development of sustainable products are all highlighted in the current strategy.
The tension in the design and development of products is clearly obvious in the response to Nike’s current strategy. Comments that “we should be more like Crocs; they are to our industry what Apple is to computing,” undermine the effort to which Nike is actually achieving innovation. There was a feeling from some that Nike had too much “crappy stuff”. The challenge inherent in this claim is that Nike risk losing their competitive advantage in design and development to competitors. Recent design and development efforts by Nike have had mixed response: the release of Nike+ was hugely successful, however the design of a recycled running shoe failed to gain traction with customers. Nike needs to rethink this strategy in terms of how its core users interact and engage with Nike’s products.
Supply to Customer
In response to criticism of its outsourcing practices and of other issues regarding sustainability, in 2007, Nike established a five-year corporate responsibility target for itself. Nike recently released a report outlining the progress it has made for the 3 year period of 2007-09 (Nike.com). user2010-07-30T11:47:00
look for reference
According to the report, Nike has made progress on many fronts, such as implementing proper Human Resource Management practices in contract factories, reducing waste and toxins in manufacture and increasing its use of environmentally preferred materials.
There remain areas for Nike to improve on, such as managing overtime in contract factories. Nike has also revised and clarified targets in a few instances in the light of a better understanding of the complexities of the strategy. More needs to be done to protect the brand image of Nike in this regard.
Nike Branded Stores
Nike has plans to open approximately 250-300 Nike branded stores worldwide within the next five years. The objective of this strategy is to enhance the consumer experience by increasing the visibility of the brand. In the past decade Nike has attempted a similar strategy, but on a smaller scale, by opening 14 Niketown stores across the globe. As a policy, Niketown stores never gave discounts on their products, whereas other athletic shops put some Nike products on discount throughout the year. Even though Niketown stores achieved high gross margins of up to 70%, the overall operating margins of Niketown stores were lower than the 10.6% company average. Promoting competition between new branded stores and existing Nike distributors is a bold move which may endanger the company’s relationship with its distributors. Furthermore, consumers want a variety of brands when shopping for sport shoes and apparel, something that Nike branded stores cannot offer. Nike should take these past experiences into account before attempting a similar strategy.
Nike has counted on aggressive expansion in developing markets, led by China and also including Brazil, India and Central and Eastern Europe, as part of Chief Executive Mark Parker's goal to increase sales by more than 40% to $27 billion in five years. This strategy assumes importance in the wake of the impending slowdown in the mature markets of US, Japan and Western Europe. The latest annual report bears testimony that this strategy seems to be working, where with the exception of a growing emerging markets and a flat Chinese market, Nike reported an uninspiring performance. However, these markets represent a unique set of challenges and to be able to maintain the growth momentum, Nike needs to be able to rise up to these.
Design and Development
The growth target identified by Nike is not likely to come from a single market. Strategies to achieve the target have been broken into mature market and emerging market categories.
The success of recent technological collaboration between Nike and Apple for Nike+ shows signs for further development. The continued incorporation of technology to mature product lines can help to reinvent design offering.
To fuel growth in mature markets Nike should extend its product portfolio. Nike is already positioned within both cycling and within winter sports. Both these sports are equipment intensive and would offer Nike great growth opportunities. Cycling especially is an area where Nike is already well positioned and potential products are quite similar to products they already produce. In terms of branding Nike is already well positioned to enter this market. Nike is one of Lance Armstrong’s long time partners and sponsors all the leader jerseys in the Tour De France.
In examining complimentary products, Nike should extend its sports offering in the injury and recovery segments. This recommendation is based on a recent poll which revealed a growing number of sports-related injuries (2 out of 3 runners reported to be injured at any time)  . Sporting accessories to help reduce post exercise soreness and help maintain muscle length and tone could be developed. Nike could tap this market with little risk because consumers infer that all products under the brand umbrella are high quality. Nike can also benefit from synergies in production and distribution.
In emerging markets, there is a wide disparity in income levels and consequently consumption patterns. Emerging markets are more value-driven and hence product offerings need to span across price points. In India Reebok is number one with 40 per cent market share, followed by Adidas (20 per cent). Nike's 15 per cent share is a distant third (source TechnoPak Advisorsuser2010-07-30T12:21:00
). Part of the reason is the substantial pricing difference between Nike and its rivals. Nike should look at targeting the lower price segments by launching a sub-brand. This strategy was used by Nike in the US with the launch of the Starter brand of shoes marketed through Wal-Mart.
Supply to Customer
In recent years Nike has increased the emphasis on corporate social responsibility. In working towards the targets of the five-year corporate responsibility plan, Nike has achieved reasonable results. However, if Nike is to maintain its brand image, the company needs to make more credible efforts. Recommendations for improving Nike’s corporate responsibility are:
Recognizing the worker’s right to form trade unions - Nike should only outsource to countries and factories that recognize the rights of workers to organize unions. Without unions, it is near impossible for individual workers to demand improved conditions without fear of retribution.
Devising a confidential complaints mechanism - When workers endure human rights or other violations they need to be able to access a confidential complaints process, and a fast and effective response system. Nike needs to have a decentralized complaint escalation system.
Focus on long-term contracts - This allows the company to exercise more control over the operational and work environment aspects and also eliminate the possibility of leaving scores of people unemployed when it shifts its factory, something which it has been seen as indulging in frequently in the past.
Today, in mature markets, the product offering itself has become more of a commodity and the focus has shifted from providing a “product” to providing a “solution”. The “solution” incorporates the product as well as additional goods and services. Examples of these are increased ease of purchase and product customization to fit the specific needs or application of the customer.
Increasingly, consumers in mature markets are demanding more personalized services, which requires Nike to focus more closely on consumers’ individual needs and preferences. For Nike to maintain its leading position in the mature market, it needs to focus on delivering more innovative and customizable products to fit the varying needs of consumers in these markets. Nike has already made progress on this through its NikeId initiative. NikeId allows customers to customize a range of products on its website and some outlets also offer assistance to consumers for customizing the products they wish to purchase.
Nike should put greater emphasis and direct more investment on such initiatives and capitalize on this market trend. This will allow Nike to reach multiple segments of the market as well as satisfy the specific need of each individual customer, therefore increasing its share of the market. Nike is also able to charge higher margins and hence increasing its share of revenue from the existing share of the market.
For Emerging markets, in addition to its flagship stores and other premium outlets where Nike sells its namesake brand, and in line with our recommendation on Nike to develop a low-cost product specifically to address the existing gap in its product portfolio, Nike should look at opening or selling through other value retail formats specifically designed to sell these. While a value format bolsters the value association of a price sensitive customer, a different branding ensures that its high willingness to pay customers continue to associate with the Nike brand while Nike can grow the brand.
If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal: