Nike, Inc. is a leading sportswear and equipment supplier based in the United States. The company is based in Beaverton, Oregon. It is the leading global provider of athletic footwear and apparel (Sage, 2008) and a leading manufacturer of sports equipment with revenue in excess of U.S. $ 18.6 billion U.S. dollars in its fiscal 2008 (ending May 31, 2008). As of 2008, it employed over 30,000 people worldwide. The company was founded on 25 January 1964 as Blue Ribbon Sports by Bill Bowerman and Philip Knight, and officially became Nike, Inc. in 1978. Nike markets its products under its own brand and Nike Golf, Nike Pro, Nike +, Air Jordan, Nike Skateboarding and subsidiaries like Cole Haan, Hurley International, Umbro and Converse. In addition to manufacturing sportswear and equipment, the company operates stores under the Niketown name. Nike sponsors many high profile athletes and sports teams around the world with highly recognized brands “Just do it” and the Swoosh logo.
The company initially operated as a distributor for Japanese shoe maker Onitsuka Tiger (Nikebiz, 2010).
In 1980, Nike had reached a 50% market share in U.S. athletic shoe market and the company went public in December of that year (Nikebiz, 2010).
“Just Do It” is world famous Nike trademark. Throughout the 1980s, Nike expanded its product line to include many other sports and regions throughout the world.
This article aims to analyze the athletic footwear industry in India and find a place in it for Nike. The literature review includes an overview of strategies and models to help better understand Nike move into the Indian market. The discussion and analysis section will focus on Nike, in particular, and the challenges and competition facing the corporation in the foreign market. Finally, the report concludes with recommendations on how and what Nike can do to improve their performance in India.
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Globalization describes an ongoing process by which regional economies, societies and cultures are integrated through a global network that includes communication and commerce. The term is sometimes used to refer specifically to economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration and the spread of technology (Bhagwati, 2004 ). However, globalization is generally recognized as driven by a combination of economic, technological, socio-cultural, political and biological factors (Croucher, 2004). The term may also refer to the transnational movement of ideas, languages, or of popular culture through adaptation.
The past two decades have witnessed the globalization of markets and production. The globalization of markets means that national markets are merging into a huge market. The two factors underlying the trend towards globalization are : reducing trade barriers and changes in communication, information and transportation technologies (Hill, 2009). Following the globalization of production and markets in the last ten years world trade has grown faster than world output, foreign direct investment has flown, imports have penetrated deeper into the world’s industrialized nations and increased competitive pressures in industries. The benefits and costs of the new global economy are being hotly debated among businessmen, economists and politicians. The discussion focuses on the impact of globalization on employment, wages, environment, working conditions and national sovereignty.
Entry Mode Strategy
When companies decide to enter foreign markets, there are several ways to do so. The risks operating in foreign markets are often dependent on the level of control a company has, together with the level of capital expenditures invested. The main modes of entry are exporting, licensing, franchise, joint ventures and FDI (Foreign Direct Investment).
Direct export business involves shipping goods directly to a foreign market. A firm employing indirect export uses a channel or intermediary, which in turn distribute the product in foreign markets. From the point of view of a company, export risk is minimal. This is so because no capital expenditure or expenditure of corporate finance in the new non-current assets has necessarily taken place. Therefore, the likelihood of stranded costs, or the general barriers to exit, is remote. By contrast, a firm may have less control when exporting to a foreign market, due to non control of the supply of goods in foreign markets.
A license agreement is an arrangement whereby a licensor grants the right to intangible property to another entity for a specified period and in return get royalty (Contractor, 1892). Intangible property includes patents, inventions, formulas, processes, designs, copyrights and trademarks. The main advantage of licensing is that the concessionaire bears the costs and risks of opening a foreign market. The disadvantages include the risk of losing the technological know-how to the licensee and the lack of strict control over licensees.
Franchising is similar to licensing, although it tends to involve longer term commitments of licensing. The franchise is basically a specialized form of licensing in which the franchisor insists that the franchisee complies with the strict rules as to how it does business. The franchisor also generally assists the franchisee to manage the company permanently. As with licensing, the franchiser usually receives a royalty payment, which amounts to a percentage of franchisee’s revenues. Whereas licensing is pursued mainly by manufacturing enterprises, franchising is mainly used by service companies (Dunning and McQueen, 1981).
A joint venture is a joint effort between two or more business entities in order to mutually benefit from a given economic activity. Some countries (such as India and China) require that all foreign investment must be through joint ventures. Compared to exports, more control is exercised; however the level of risk is also increased. Some companies have sought joint ventures in which they hold a majority stake and therefore a tighter control (Kogut, 1988). Joint ventures have the advantage of sharing the costs and risks of opening a foreign market and to acquire local knowledge and political influence. The disadvantages include the risk of losing control over technology and the lack of strict control.
In direct investment, a company directly invests in the construction of fixed / non-current assets in a foreign country, in order to manufacture a product in the overseas market (Hennart and Park, 1993). It refers to the actual manufacturing of a product from scratch. Direct investment has increased control and more risk involved.
Companies operating internationally are facing two forces: pressures for global integration and pressures for local responsiveness (Daniels, et. Al. 2009). In thier research, Doz and Prahalad (1984) explain that the economic, technological and competitive drive global integration, while the diversity of customer needs, distribution channels, media and trade barriers between countries boost the response capacity.
Research shows that the greater the pressure for global integration, the greater the need to maximize efficiency through standardization (Daniels, et. Al 2009). Customers accept standardized products and this reduces costs for the firm (Daniels, et. Al 2009). However, international companies are under pressure to adapt their operations to local market conditions and demands of local customers and comply with policies mandated by the governments of host countries, which varies throughout the world (Daniels , et. Al. 2009).
Integrating response model, shown in Figure 1, was initially developed by Prahalad and Doz in 1987 and subsequently developed by Bartlett and Ghoshal, 1989. It shows the interaction between global integration and local responsiveness (Daniels, et. Al. 2009). The IR model has four strategies to guide international corporations to compete in foreign markets: the Global strategy, the International strategy, the multidomestic strategy and the transnational strategy.
Figure 1 IR model (Hill 2009)
The international strategy is adopted by companies when they want to enter into foreign markets. Secondly, a multidomestic company is “locally responsive” (Daniels, et. H 2009, p.475), allowing each of its operations in foreign countries to act independently. The subsidiaries are free to respond to the preferences of local customers in the design, manufacture and marketing of products (Daniels, et. Al. 2009). A global strategy maximizes integration and pushes a company to make a standardized product for a global market. Finally, the transnational strategy differentiates the capabilities and contributions from country to country and allow’s companies to learn from them, adopting an integrated framework of technology, financial resources, creative ideas, and people (Daniels, et. Al. 2009).
Nike has hired more than 700 stores worldwide and has offices in located in 45 countries outside the United States. Most factories are found in Asia, including Indonesia, China, Taiwan, India, Thailand, Vietnam, Pakistan, Philippines and Malaysia (Nikebiz, 2010). Nike’s entered India through a seven year licensing agreement with Sierra Industrial Enterprises for their sales, unlike Reebok, for example, which is a wholly owned subsidiary of U.S. parent. In 2004, instead of renewing the franchise, Nike India became a subsidiary. “The Indian market is growing in terms of sales, customer spends and awareness. Only made sense for us to capitalize on these opportunities as soon as possible,” says Gangopadhyay.
Nike India Ltd (BIL) is the largest footwear company in India. Nike first established in India in 1931 for their product manufacturing. The company is headquartered in Calcutta and manufactures over 33 million pairs per year. It has a distribution network of more than 1,500 stores and 27 warehouse’s which provide excellent access to consumers and wholesale customers throughout India.
As on 31 December 2006, the parent in Canada had a 51 per cent share, while institutional holding was about 13 percent. While retail sales have increased in value and volume, wholesale sales have decreased due to the restriction of supplies as a means to recover the outstanding customers. The recession and slow market conditions in the industry have also had a direct impact on retail sales and profitability.
In the words of Simonson, “The benefits and costs of installation of each customer preference are more complex and less deterministic than is assumed. That’s because customer preferences are often ill-defined and susceptible to various influences, and in many cases, customers have poor knowledge of their preferences.” In one of his recent articles, Simonson tackles the issue of one-to-one marketing and mass customization. Supporters of these marketing methods have suggested that learning what customers want and give them exactly what they want will create customer loyalty and great barrier to competition.
The administration says it is not unwilling to outsource if it worked out cheaper. It is also open to the idea of shoe imports – mostly from China – if it is cheaper.
Nike and Reebok India Company have announced an agreement for a partnership regarding the retail sale of Reebok and Rockport shoes at Nike outlets. The partnership involves a wide retail sale of sports shoes for walking, running, tennis and training for personal fitness and sports ranging from Rs 900-2,500.
For the third quarter ended 30 September 2007, Nike India reduced its losses to Rs 5.68 million rupees (Rs 8.51 million rupees) in a 9.2% increase in net profit to 154.27 million rupees rupees (Rs 141.26 million rupees). The company is struggling to keep its market share in the price sensitive market in India, despite strong brand recall. 97% of company revenues are on the domestic market while the remaining exports.
Nike India’s major problems include the high cost of production and little emphasis on marketing. The company may be able to address the first problem through outsourcing products.
Nike India has also been trying to focus on the aggressive marketing of their products. Nike India has plans to invest in sophisticated machinery to keep its niche place in manufacturing. The company has made a fresh approach to its retail business.
The management of Nike India is making considerable progress in terms of improving market penetration, focus on configuration stores, distribution logistics, and improve industrial relations and streamlining overhead. Launching new products always stood at center stage of the operations of the company.
At the same time, with the opening of the economy, more and more products are imported from China. Alternatively, like other Indian manufacturers, including Nike may consider relocating their production bases in China. However, it is not so easy task.
Nike India, 51% subsidiary of Toronto-based Nike Shoe Organization, remains the major player in the Indian footwear market, although its share in the footsteps has been declining over the years.
Now, in an attempt to determine the appearance of all the products and prices, Nike India has decided to restructure its 1,300-outlet strong business division retail along specific segments of customers in the Bazaar, the family, the city and shops.
Nike India Ltd (BIL) is India’s largest selling shoe company more than 60 pairs of Mn per year in India, USA, UK, Europe, Middle East and Far East. BIL has a market share of 60% in leather products and 70% in sneakers.
Until recently, India dint really understand the marketing strategy of Nike. Realising that India is a cricket crazy nation, Nike in December 2005 bound in training schools, such as the National Academy of the BCCI cricket. Nike has become the official sponsor of the team’s cricket team in India. They have paid Rs 196 million rupees (Rs 1.96 billion) to the Board of Cricket Control in India for the privilege. Nike is targeting youth in India. Its also paying attention to other popular games in India. It was in a partnership with the All India football federation since March 2006.
Nike is a very competitive organization. Nike has a healthy dislike of its competitors. Nike has no factories. It does not invest capital in buildings and industry workers. This makes it a very lean organization. Nike is strong in research and development, as demonstrated by the evolution and range of innovative products. It produces high quality products at the lowest price possible. If prices rise and the products become cheaper then Nike move’s its production plant. Nike is a global brand. It is the number one sports brand in the world. Its famous “Swoosh” logo is immediately recognizable.
The organization has a diversified range of sports products. However, business income is still very dependent on their participation in the footwear market. The retail sector is very price sensitive. Nike has its own store of Nike Town. However, most of its revenue comes from sales at retailers. Retailers tend to offer a very similar experience to the consumer. So the margins tend to be squeezed as retailers try to pass some of the low pressure on prices in the competition from Nike.
Product development offers many opportunities for Nike. Some argue that in youth culture especially, Nike is a fashion brand. This creates its own opportunities, since product could become fashionable before it wears out. The company can also be developed internationally, building on the strong global brand recognition. There are many markets that have the disposable income to spend on high value sports goods. For example, emerging markets like China and India have a generation of newly rich consumers. There are also global marketing events that can be used to support the brand, such as the World Cup (football) and the Olympic Games.
Nike is exposed to the international nature of trade. As it buys and sells in different currencies, costs and margins are not stable for long periods of time. Such exposure may mean that Nike could be manufacturing and / or selling at a loss. This is an issue that faces all global brands. The market for athletic footwear and apparel is highly competitive. Competitors are developing alternative brands to take away market share from Nike. As discussed in the weaknesses, the retail sector is becoming price competitive. Ultimately, it means consumers are shopping for a better deal. Such sensitivity to consumer prices is a potential external threat to Nike.
The footwear industry in India is highly fragmented and dominated by the informal sector. The size of the industry is around Rs 75 billion and is growing at around 10% annually. Nike competes with local players such as Liberty Shoes, Phoenix International, Mirza Tanners, Tata, Action, Lakhani Shoes Shoes and global players like Adidas, Reebok and Nike. Footwear sales contribute over 96% of sales, whereas Accessories and clothing represent the rest.
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Nike took the right to become the official sponsor of the team’s cricket team in India for the next five years, beating his rival Reebok and Adidas, by paying Rs 196 million rupees (Rs 1.96 billion) to the Cricket Control Board of India for the privilege. The first “Just Do It” ad in Cricket also made an appearance during the Champions Trophy. “We look at what drives the passion for cricket in India. Our goal is to connect emotionally with our customers,” said Sanjay Gangopadhyay, marketing director of Nike India. The American athletic footwear and apparel giant has had a presence in India for almost a decade, but is aware of where the “international” image (Bilwalkar, 2006). All these years, market leadership has eluded Nike in India. This is the only market where Reebok has a (40 percent market share), followed by Adidas (20 percent). Nike, 15 per cent share is a distant third (Technopak Advisors, 2010).
“This is a good move by Nike to promote products to a serious level and build brand awareness through its commitment to the development of sport in India,” says Harminder Sahni, COO, Technopak advisors.
Competitors like Reebok and Puma are looking to expand the product line of sports as a lifestyle brand for 17-35 years. While Reebok is looking to increase its womens exclusive, while 70 per cent of the merchandise in Puma stores are in lifestyle and not related to the sport.
“We want young people to become serious about sports that interest them,” says Gangopadhyay. The announcement of cricket, for example, is clearly aimed at this group.
Department stores are the first channel for sales and marketing of consumer goods of leather. Furthermore, the decoration of the store and sample products must be designed to create a strong first impression. Seasonal promotional campaigns such as special discounts and announcements can be put in place. The new lines of collections can be made for festivals.
In addition to promotional activities at malls and department stores, discounts and television ads are considered effective channels for promotion. It is advisable to pay attention to the affordability of customers in different cities, while setting the pricing points for different product categories.
Because of its growing purchasing power, rising middle class should be the goal of the sellers of consumer goods of leather. It is also useful to introduce appropriate designs that cater for the tastes of the middle class.
The first objective of the Nike brand in India would to build its brand reputation, image and equity. It has to ensure that its brand name does not get tarnished due to the Human Right concerns and the Environmental issues. The secondary objective of the Nike brand in India would ensure that they match the market share and sales volumes of its competitors. A company, product or brand can have a very good reputation and image, but if not profitable, ist not fulfilling its purpose. At the same time, sales figures and data can be misleading. Therefore the market share also has to be paid attention to.
Nike despite being one of the most popular brands in the world has not really caught on in India. We also note that Nike is on par with Reebok. This again does not reflect too well on the brand, considering that Nike outsells Reebok everywhere in the world.
Therefore, it is reasonable to say that the ratings of Nike in India could do with a boost. The best way to achieve this would be a serious brand building. The brand image must be improved and people should be aware of their presence. Thus, the logic of choice for improving brand image and reputation as a major corporate objective is very clear.
From Nike’s distinctive competence is in the area of marketing, particularity in the area of consumer awareness of the brand and brand power. Globally, the key to the distinctive competence rises over the competition. As a result, Nike’s market share is number one in the athletic footwear industry in most places around the world. Phrases like “Just Do It” and symbols like the Nike “Swoosh”, pair with sporting icons to serve as instant reminders of the Nike empire. It is time that this competition is leveraged in India.
Nike’s vision is to remain the industry leader. The company plans to continue to produce quality products that have been provided in the past. Most importantly, Nike needs to meet ever changing customer needs through product innovation. In the past, the company has been using product differentiation as a competitive strategy. While Nike’s reputation dictates, emphasis will continue in this field. Nike has built its business on providing products that rise above all others and this has led to the worldwide success today.
Nike is known for its technologically advanced and is the leader in this area. This allows Nike products to highlight the rest.
Nike is also focussing on making a great effort in price leadership. Nike products in the past have concentrated on the upper end of the price category. Nike is now concentrating on lower levels of prices with quality products. This will enable Nike to capture even greater percentage of market share.
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