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Nike’s Competitive Advantages: Strategies in China

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Published: Tue, 06 Feb 2018

With widely globalization movement, managers in MNCs have to be continually involved into the challenges that mainly include competitive and collaborative challenge. Facing the challenges, Nike has always been a leading sports product organization. Thus, it is meaningful to analyze Nike’s global success which will benefit from obtaining relevant international management issues.

The aim of this project is to reveal Nike’s competitive advantages in global market and especially focus on company strategies in Chinese market. In order to achieve practical guidance, some theoretical tools will be adopted.

The project will firstly introduce a literature review which provides the underpinning and explanation of these analysis tools. In the following, Nike company analysis will be discussed into four aspects. The first aspect will examine the national business environment of Nike in the USA by using Porter’s diamond. In the second and third section, Bartlett and Ghoshal’s theory will be used to analyze both the competitive challenge and the collaborative challenge of Nike in China. Hofstede culture dimensions will be adopted to analyze the cultural challenge Nike is confronted. Finally, it comes to the conclusion.

1.2 Company overview

Through an investment of $500 each by Phil Knight and Bill Bowerman, the company (then called Blue Ribbon Sports–BLS) was founded in 1964. It has evolved from an importer and distributor of running shoes to the world biggest leader of athletic footwear.

Our business model today is basically the same as our model in 1964.It is that we invest our money in design, development, marketing and sales and then contract with other companies to manufacture our products. Knight developed Nike’s business model when he was attending Stanford Business School in the early 1960s.He realized that most leading footwear companies

were still producing their own shoes in higher-cost countries like the United States and Germany while he US consumer appliance and electronic markets, were starting to be taken over by lower-cost, high-quality Japanese producers. Knight believed that Blue Ribbon Sports could sell in a lower price by distributing its production to Japanese producers to break into this market. So Blue Ribbon Sports began to import high-tech sports shoes from Onitsuka Tiger of Japan. BLS began to have its own branches of shoes, as sales increased to almost $2 million in the early 1970s. The company officially changed its name to Nike, Inc. in 1978.At the beginning time Nike developed a strong working relationship with two Japanese shoe manufacturers, Nippon Rubber and Nihon-Koyo, but as a combination of a tighter labor market, the impact of the first Oil. Crisis on Japan’s economy, and a shift in the dollar/yen exchange rate in the 1970s, Nike began to search for other producers. Nike established its own shoe factories in Maine and New Hampshire to develop a reliable and high-quality production to supply its growing domestic market during these same years. The company also began to contact potential suppliers in Korea, Thailand, China and Taiwan. As costs continued to increase in both Japan and the United States, by the early 1980s, and the Korean government created many incentives to develop Korea’s footwear industry, Nike closed its US factories and sourced almost all of its production from Asia.

In 1982, 86% of Nike’s athletic footwear came from Korea and Taiwan.

However, costs also began to increase in the two countries. Nike had to urge its suppliers to re-locate search for other owner-cost countries to relocate their operations. Then the company opened up their factories in Indonesia, China and Vietnam. Nike was able to help its lead vendors establish an extensive network of footwear factories throughout Southeast Asia by guaranteeing a number of important orders and by placing Nike employees at these new factories.

At the present, Nike’s products are manufactured in more than 700 factories, employing over 500,000 workers in 51 countries of which only 22658 are directs employees, the majority working in the United States. Over the years, Nike has broadened its product range. Whereas in 1980, Nike sold 175 different styles of shoes, it offered many different styles in its spring collection. The company has also focused on apparel and sports equipment and expanded its sales to Europe, Latin America and Asia. Last year, Nike made about $9.5 billion in revenues, of which 59% came from footwear sales and 29% from apparel.

2 Literature Review

2.1 Porter’s national competitive advantage

Michael Porter (1990) meticulously introduced a model that intended to answer the questions, “why do some nations succeed and others fail in international competition?” and “why some industries within nations are more competitive than others are” in his book The Competitive Advantage of Nations. Porter (1990) states that the sources of competitive advantage can be found in the “national diamond,” comprising four major economic attributes: factors conditions, demand conditions, supporting industries and firm strategy and structure. Porter believed that the four elements have bilateral impacts, forming a diamond system. Besides, there are two variables: the Government role and opportunities. The opportunity is beyond control, and the impact of government policies can not be ignored. All the determinants comprise a diagram as follow.

Factor conditions

Factor conditions can be categorized into two forms: “Home-Grown” resources and highly specialized resources. The first one referred to the original resources from one nation. And the latter one pointed out that a country creates its own important factors such as skilled resources and technological base. In the actual competition, Porter (1990) stated that sufficient in natural resources or low cost factors often result in inefficient allocation of resources. By contraries, local insufficient in factors of production could lead to innovation. Also, resource constraints may encourage development of substitute capabilities. For example, Japan’s relative lack of raw materials has stimulated miniaturization and zero-defect manufacturing (Grant, 1991).

Demand conditions

According to Porter (1990), demand conditions in the domestic market provide the primary driver of growth, innovation and quality improvement. A strong domestic market could be seen as stimulation to the firm from being a startup to a slightly expanded and bigger organization. For example, the world’s famous automobile companies like Mercedes, BMW, and Porsche in the case of German have dominated the world when it comes to the high-performance segment of the world automobile industry. However, in German, automobiles with a cheaper price in the market have little competitive advantage. The reasons could be attributed to the demand conditions in domestic market. The Germany market traditionally demanded a high level of engineering performance. Also, the transport infrastructure of Germany such as Autobahns does tend to favor high-performance automobiles.

Related and supporting industries

The third determinant of national advantage is the presence in the nation of related and supporting industries that are internationally competitive. Based on Porter’s view, when local supporting industries are competitive, related company will enjoy more cost effective and innovative inputs. Secondly, this effect is strengthened when the suppliers themselves are strong global competitors.

Firm strategy, structure, and rivalry

Inevitably, the strategies and the structure of the firms play a key role to influence the national performance in particular sectors. Also, competition indeed has a great impact on driving innovation and the subsequent up gradation of competitive advantage. Obviously, domestic competition is more direct compared with the impact of foreign competitors. So the stimulus provided by home national competition is higher in terms of innovation and efficiency. As an example, in the Japanese electronic industry, there are many local competitors (Panasonic, Sony, Toshiba, Mitsubishi and so on) providing intense competition in the domestic market, as well as the foreign markets in which they compete.

Government’s role

Despite the impact from Government policies and regulations do not belongs to the major determinant of national advantage, to some extent, they play an important role on influencing the national system. Porter (1990) pointed out “Government’s proper role is as a catalyst and challenger. At first, government can provide a basic environment for industry development, since it could invest on infrastructure development, opening up capital channels, training information integration and so on. Also, governments can create new opportunities and pressures through intervene activity. In addition, governmental sourcing could enlarge product demand. What is most important, the government could ensure that the domestic market is under lively competition, avoiding Trust status.

Opportunities

Opportunities can not be met rectifiable, and one opportunity could influence the four elements to change. Porter (1990) pointed out that, in terms of the enterprise development, there are several circumstances when chances are brought: the basis of scientific and technological inventions, fault emerging in traditional technologies, a sudden increase the cost of production caused by external factors (such as the oil crisis), financial markets or major changes in the exchange rate, market demand surge, the government’s major policy decisions and war. In fact, the opportunity is a two-way. It is quite often that new competitors gain an advantage accompanying with an advantage concession of other competitors. And only when enterprise could continually meet the new needs of manufacturers, “opportunities” will be developed.

Flaws in Porter’s diamond

Although Porter’s model is widely used, it also has a number of critics. Firstly, Dunning (1993) pointed out that there is nothing new in Porter’s diamond analysis. Dunning commented that a country’s competitive advantages were under the impact of globalization of production and markets. He also pointed out that value generating assets of a country has been taking the form of created assets like human capital instead of the natural assets like land and untrained labor. Thus, Dunning considered that Porter’s diamond of national competitive advantages was required to be transnational since widespread globalization of the world economy. Secondly, Rugman and D’Crusz (1993) stated that Porter’s diamond underestimated the importance of foreign investment. This model could not adequately explain the competitive advantages of developing countries which heavily depend on foreign direct investment. (Lee, 1998) And they also commented that this model is incomplete for small economics which are not parts of the trial nations and is only applicable to triad nations. Thus, they thought Porter only thought over the exports and outward FDI of domestic industries and further neglected the sales abroad by foreign subsidiaries. What’s more, Bosh and Proijen (1992) stated that Porter paid too much attention on the importance of culture while evaluating the international competitive advantages. Meanwhile, Ball and McCulloch (1999) implied that this model’s evidence is anecdotal without empirical evidence. And it is an ex-post model and has no predictive powers since the number of variables lead to weaken any predictions, in particular inclusion of chance into the equation.

To sum up, Porter’s diamond still is a useful tool to examine competitive advantages although it has insufficient application.

2.2 Competitive challenge

MNEs need to create and sustain competitive advantages to overwhelm the competitive challenges from the global competitors. There are a great many of varied prescriptions about selecting strategies to develop advantages.

It is argued that one of the successful strategies is to produce products standardized and sell them throughout the market via the same ways (Levitt 1983). On the contrary, some scholars suggest that, rather than single product, a relatively broader product portfolio with products diversity can enable the share of investment (Hamel and Prahalad 1985). In addition, Porter et al (1982) indicted that, to implement global strategy effectively, it needs a number of approaches including exploiting economics of scale via global volume and managing interdependently to achieve synergies across different activities. Two basic types of competitive advantage which are lower cost and differentiation are suggested by Porter (1990) as well. Porter points out that, to achieve competitive advantage, it is necessary for a firm to provide customers with values more efficiently (low cost) or to create greater values and charge a premium price in a more special way (differentiation) than its rivals.

By contrary of the above statements, to build up competitive advantage sustainably, MNEs are suggested to achieve three strategic objectives which are global efficiency, multinational flexibility and worldwide learning (Bartlett et al. 2008). However, it challenges almost all MNEs to achieve all of these objectives at the same time. Efficiency can be considered as the ratio of the value of a firm’s output to the value of its input while Flexibility means the “the ability of a company to manage the risks and exploit the opportunities that arise from the volatility of a global environment” (Bartlett et al., 2008, p.200). The last objective refers to the ability of a firm to learn from its exposure and opportunities internationally, and to apply the learning in a global environment.

For the purpose of building up global competitive advantage, it is suggested three fundamental tools: “exploiting differences in sources in sourcing and market potential across countries, exploiting economies of scope and exploiting economies of scale” (Bartlett et al. 2008, p.201). Factors which may lead to competitive advantage are indicated by every goals-means intersection indicates (Bartlett et al., 2008). Table 1 shows the varied goals and means to achieve competitive advantage throughout the world.

Table 1: Worldwide Advantage: Goals and Means

StrategicObjectives

Sources of Competitive Advantage

National Differences

Scale Economies

Scope Economies

Achieving efficiency in current operations

Benefiting from differences in facto costs-wages and cost of capital

Expanding and exploiting potential scale economies in each activity

Sharing of investments and costs across markets and business

Managing risks through multinational flexibility

Managing different kinds of risks arising from market-or policy-induced changes in comparative advantages of different countries

Balancing scale with strategic and operational flexibility

Portfolio diversification of risks and creation of options and side bets

Innovation, teaming, and adaptation

Learning from societal differences in organizational and managerial processes and systems

Benefiting from experience- cost reduction and innovation

Shared learning across organizational components in different products, markets, or businesses

Source: Bartlett et al. (2008), p203

There are four strategies which can enable exploiting competitive advantage through different goal-means combinations (Bartlett et al., 2008):

Multinational strategy achieves most strategic goals by emphasizing national differences. The firms which have adopted this strategy tend to operate business based on local environment. They are flexible and responsive to local environment, but there is a lack of capability to learn globally within these firms owing to the fact that almost all national units operate independently.

Based on the worldwide environment, international companies apply all the approaches to create and exploit innovations. This approach is helpful to strengthen the ability of developing innovations and leveraging knowledge on a worldwide basis; however it is challenged by the problem of deficiencies in both respects of efficiency and flexibility.

All the means are applied by MNEs which adopt global strategy to realize global efficiency. However, flexibility and worldwide learning this kind of approach may be negatively influenced by this kind of approach. What is more, high sourcing risks may be resulted from the focus of activities of achieving scale economies.

The three traditional strategies discussed above respectively possess unique assumptions about how to build up worldwide competitive advantage. Multinational companies emphasize differentiation, international companies focus on innovations, and global companies concentrate on building the best-cost position. It is indicated that a global industry can be more successful than a multinational one in some industries (Yip 1989). Additionally, Yip (1989) also suggested that a balance between overglobalizing and underglobalizing can be found in most successful strategies. Nevertheless, Bartlett et al. (2008) believed that the best strategy should be consisted of syntheses of all these approaches. It suggests that MNEs should adopt the transnational strategies which “focus on exploiting each and every goal-means combination to develop layers of competitive advantage by exploiting efficiency, flexibility, and learning simultaneously” (Bartlett et al., 2008). Strategic orientation and configuration of assets and capabilities vary with the four types of companies, which is shown by table 2.

Table 2: Strategic Orientation and Configuration of Assets and Capabilities in Multinational, International, Global, and Transnational Companies

 

Multinational

International

Global

Transnational

Strategic

orientation

Building flexibility to respond to national differences through strong, resourceful, and entrepreneurial national operations

Exploiting parent-company knowledge, capabilities through worldwide diffusion and adaptation

Building cost advantages through centralized, global-scale

operations

Developing global efficiency flexibility, worldwide learning capability

simultaneously

Configuration

Of assets and capabilities

Decentralized and nationally self-sufficient

Sources of core competencies centralized, others decentralized

Centralized and globally scaled

Dispersed, interdependent, and specialized

Source: Bartlett et al (2008), p206

2.3 Collaborative challenge

A number of organizations tend to cooperate with other parties such as their suppliers, distributors and competitors, when they believe that it is difficult to develop and enhance the global competitive advantages in the increasingly complex global environment (Bartlett et al. 2008). The strategic alliance is viewed as the most important collaborative strategy, which is to set the cooperative relationships between MNEs and their rivals (Bartlett et al. 2008). Bartlett (2008) stated that “strategic alliances had become central components of most MNE strategies

The strategic alliances is divided into two categories namely scale alliances and link alliances (Daniels et al., 2007). Moreover, Griffin and Pustay (2005) identified two broad types of the strategic alliance, which includes the comprehensive and functional alliance. The latter one includes production alliance, marketing alliances, financial alliances and R&D alliances. The alliances assist of some types such as cooperation agreement, franchising and joint venture (Bartlett et al., 2008). There are some differences between the traditional joint venture and the new forms of strategic alliances. The traditional form seems to be used for a senior multinational firm in an industrialized country and a junior local partner in a less-developed or less-industrialized country. The new strategic alliances tend to serve the organization in industrialized countries. At the same time, the modern alliances concentrate on the development and innovation of new products and technologies rather than the distribution of existing ones. What is more, the present-day strategic alliances seem not to survive for a long time to contribute for the companies.

There are some main reasons that the companies need to set the collaborative arrangement. Daniels et al. (2007) identified two groups of motivations. In the first place, the companies need to consider the general reasons, which involve spread and reduce costs, specialize in competencies, avoid or counter competition, secure vertical and horizontal links, and learn from other companies. The second one is the specific reasons, including gain location-specific assets, overcome legal constraints, diversify geographically, and minimize exposure in risky environments. However, Bartlett et al. (2008) outlined that there are five significant motivated issues to support the building of strategic alliances: technology exchange, global competition, industry convergence, economies of scale and reduction of risk, and alliances as an alternative to merger.

Bartlett et al. (2008) also identified the risks and costs of collaboration. The collaborative alliances could create the opportunities for one or both cooperators to enhance the competitive advantages better than other, and there is the risk that “collaborating with a competitor might be a precursor to a takeover by one of the final” (Bartlett et al. 2008). Therefore, the organizations need to have the capability to manage the cooperated relationship in order to reduce the collaborative risks. There are three dominating challenges namely managing the boundary, managing knowledge flows, and providing strategic directions. However, there are some principles set to estimate which companies benefit most from competitive collaborations. These principles include as: collaboration is competition in a different form; harmony is not the most important measure of success; cooperation has limits; learning from partners is paramount.

2.4 Cultural challenge

Understanding culture differences and diversifications is vital for MNCs’ managers in international business and foreign affairs. In this context, the major task for MNCs is to adapt different culture in different countries effectively and efficiently.

2.4.1 Hofstede’s cultural dimensions

Hofstede (1980) created five dimensions to distinct countries with their respective culture backgrounds, which are Individualism-Collectivism, Power distance, Uncertainty avoidance, Masculinity-Femininity and Long term-Short term orientation.

Power distance

Power distance is “the extent to which less powerful members of institutions and organizations accept that power distributed unequally (Hofstede and Bond, 1984).” Leaders from high power distance countries, for example, Belgium and France, are more likely to enquire the low-level employees to obey their orders blindly. What the subordinates think or achieve for the company is not important. So the authoritarian and paternalistic leadership style could be accepted in these countries. On the contrary, low power distance countries for instance, the US and UK, leaders from these countries should be resourceful democrat. And subordinates expect to be consulted and their advices to be taken seriously. They also consider hierarchy in organizations as exploitation (Yates, 2008). Therefore in these countries participative leadership style could be useful.

Uncertainty Avoidance

Uncertainty avoidance is “the extent to which people feel threatened by ambiguous situations and have created beliefs and institutions that try to avoid this (Hofstede, 1980). In high uncertainty avoidance countries, such as Belgium and Japan, leaders generally do not like uncertainties. They trust on experts and their knowledge, institute many rules to fulfill the high need for security and nearly have no tolerant for deviant ideas (Hodgetts, 2006). Thus, authoritarian and paternalistic leadership style could work in these countries.

Conversely, in low uncertainty avoidance countries such as The United States and The United Kingdom, leaders are more of risk takers. Fewer rules are set in the organizations and deviant ideas are to some extent welcomed by the leaders. Therefore, participative leadership style could be popular in these countries.

Masculinity

Masculinity is defined by Hofstede (1980) to describe “a situation in which the dominant values in society are success, money, and things.” The other side versus the masculinity is femininity which is also defined by Hofstede (1980) as, “a situation in which the dominant values in society are caring for others and the quality of life.” Japan has a highly masculinity orientation. (Hodgetts et al, 2006). Leaders with this kind of cultural background are expected to be decisive, firm, assertive, aggressive and competitive culture heroes. Few of them are female.

On the contrary, Russia and most of the socialist nation’s scores low for this dimension, such as China and France (Brandley, 1999). To support the needs of the workers and their families is the most important role of the manager with in these countries. They are employees like others.

Individualism

Individualism is “the tendency of people to look after themselves and their immediate family only”. (Hodgetts et al, 2006) The opposite side versus individualism is collectivism which is “the tendency of people to belong to groups or collectives and to look after each other in exchange for loyalty (Hodgetts et al, 2006). Most high individualism countries are wealthy countries with high GNP. However, Japan is an exception, Leaders from collectivism countries pays more attention on work in a union. Japan is a typical collective country. For example, the president of Sony Corporation, Akio Morita once said his firm likes a ship; each employee shares the same fate. All staff would suffer if one went wrong (Lee, 1982).

In the contrast, individualism focuses on individuals. As an example, the USA leaders usually appraise the performance of the substance individually, because it was found by Earley’s study (1989) that, American performed well when they are told their achievement would be measured individually.

Long-term orientation

Leaders from LTO countries are persistent, ordering relationships by status and observing this order, thrift and having a sense of shame. In the contrast, STO countries’ leaders are with personal steadiness and stability and reciprocation of greetings, favors, and gifts (Hofstede, 1991). Therefore, authoritarian and paternalistic leadership style could increase the efficiency of management in the LTO countries. On the contrast Participative leadership style could be efficacious in STO countries.

In the background of global economics, multinational enterprises are growing rapidly. It has become a common phenomenon that a manager enter into a new countries to lead a group of people with diverse cultural background. Nike is one typical MNC among them. In the following parts, this essay will use the Nike case as an example which manifests that different countries with their respective culture backgrounds require different leadership styles.

2.4.3 Criticism

Hofstede derived his data from questionnaires that were distributed among employees of IBM. However, this theory may hide certain dimensions, or values may be wrongly derived because of certain situational influences on the respondents. As a result, Hofstede’s research has been criticized by other theorists. Firstly, Tayeb (1996) pointed out that this research was based on attitude-survey questionnaire which could not effectively reflect underlying values of culture. Secondly, IBM as the only sample is not representative. (Robinson, 1983) This is because IBM mainly is comprised of middle-class employees and it has a powerful US-derived organization culture, namely, the respondents may not reflect local national cultures. Thirdly, Hofstede and his associates come from Europe and America and may have cultural bias. (Roberts and Boyacigiller, 1984) Fourthly, Mead (1994) stated that Hofstede’s research has been outdated whose research was conducted between 1967 and 1973. Young people have being influenced deeply by the development of globalization and they tend to share a common set of values recently. Generally speaking, despite Hofstede’s model has many limitations, it is still a simple and easily comprehensible model to research nation’s cultural differences.

3 Company analysis

3.1 Sports products Industry relate to American National Diamond

3.1.1 Factor Conditions

From the factor conditions view, there is a good home base for sports products companies in US.

Firstly,


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