Strategic Analysis: Nike

Competitive Analysis Nike, Inc.s principal activities are to design, develop and market high quality footwear, apparel, and equipment and accessory products. It sells its products to retail accounts, through NIKE owned retail including stores and Internet sales and through a mix of independent distributors and licensees, in over 170 countries around the world (Wright report). It operates in the United States, Europe, Asia, Africa and Canada. NIKE, Inc. competes on a number of dimensions: footwear, non-store retail, Internet retail, consumer products manufacturers, apparel and sporting goods and equipment. Its apparel business competition is fragmented but its footwear business is consolidated where only a few viable competitors exist. One might assume that Nike could influence the apparel industry simply because of its strength in footwear; however, market share numbers show differently. According to US Athletic Retail Market Report, 2009 Edition, Nike had approximately 31% of the global market share of athletic footwear at yearend 2008 and Adidas, Nikes biggest competitor, had only 16% of the share. The other 53% of the market share was divided among Puma (7%), New Balance (6%), ASICS (5%), Converse (4%), K-Swiss (2%), Sketchers (5%). The remaining share (18%) was divided among a variety of other
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smaller athletic shoe companies. Nikes global market share of athletic apparel, however, looked very different (US Athletic Retail Market Report, 2009 Edition). Nike had only approximately 7% of the market. Adidas had 6%; Reebok, Quicksilver, Columbia and Puma each had 2%; and Quicksilver had 3%. The remaining market share, a huge 75%, was spread among a variety of smaller companies. One such company, Under Armour, based in Baltimore, Maryland, can not be ignored. Its products resonate with consumers and are growing rapidly in the marketplace. Armours financial results for the fourth quarter and year ended December 31, 2009 indicated that net revenues increased 24.0% in the fourth quarter of 2009 (Under Armour Investor Relations Report, 2010). Nike has competitors everywhere it looks. They exist in its small share of apparel and in its large share of footwear. Michael Porters framework for competitive strategy serves as a model to understand competitive analysis (Porter, p. 187): the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, and the threat of substitute products or services are all critical pieces to the analysis. All of these elements are critical in understanding the degree of competition that exists for this company.

Threat Of New Entrants Barriers to entry are high making the

threat of new entrants low. Nikes large-scale operations make it easy for the company to control costs. Furthermore, Nikes exceptional marketing has created a brand recognition and identity that make it difficult to rival. Nikes relationships with suppliers, retailers, and consumers are built on years of successes and failures. Any real threat would probably require years in the marketplace. Bargaining Power of Suppliers Nike manufactures wherever it can produce high quality product at the lowest price. If prices rise, and products can be made more cheaply elsewhere to the same specifications, Nike will move production. Nikes products, however, are subject to risks associated with overseas sourcing, manufacturing, and financing. Virtually all of Nikes footwear is produced outside of the United States. In fiscal 2008, contract suppliers in China, Vietnam, Indonesia and Thailand manufactured 36 percent, 33 percent, 21 percent and 9 percent of total NIKE brand footwear, respectively (Nike Annual Report). The principal materials used in Nikes apparel productsi.e., natural and synthetic fabrics and threads, plastic and metal hardwareare available in countries where Nike manufacturing takes place. Therefore, Nike competes with other companies for the production capacity of independent manufacturers that produce its products and for import quota capacity. Ultimately, the production processes determine the power of suppliers. All companies are exposed to the international nature of trade. Nike buys and sells in different currencies and so costs and margins are not stable over long periods of time. Such an exposure could mean that Nike might be manufacturing and or selling at a loss that other companies could not afford to do. Currency exchange rate fluctuations can disrupt the business of the independent manufacturers that produce Nike products by making their purchases of raw materials more expensive and more difficult to finance. In the 21st century Nikes ability to manufacture products or procure materials, import products, and sell products in international markets are now at risk because of disease outbreaks, terrorist acts and military conflict. Few people are cognizant of these threats and few companies can afford to take on these risks.

Threat of Substitute Products The market for sports shoes and garments is very competitive. Competitors are developing alternative brands to take away Nikes market share; however, few are capable of making a dent in Nikes market share. First, Nike uses trademarks on nearly all of its products. These readily identifiable marks are a deterrents to potential substitutions. Consumers identify with these brands and often buy shoes because of these distinctive marks: NIKE, Swoosh Design, and Just do it trademarks are among their most valuable assets and are registered in over 100 countries. These trademarks, patents, and intellectual property rights are important to the Nike brand and their competitive position.3 .Understanding the consumer is at the forefront of what Nike does well. As a result, Nike has breath in its product lines and depth in its shoe lines. Nikes products are truly not that different but its marketing has convinced its consumers that they are. Nikes many proprietary product differences (e.g. a couple of gel packs in the heel can make you run faster and longer with reduced risk of injury) make it extremely difficult for new companies to enter the footwear market and offer something that differentiates themselves from the Nike giant. Innovation, both technical and design, contribute to the success of Nike. According to its corporate report, specialists in the fields of biomechanics, exercise physiology, engineering, industrial design and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts develop and test their cutting edge performance products (Nike Annual Report). It would be cost prohibitive for an upstart company to garner and leverage the breadth and depth of these resources. Nike takes pride in getting the top athletes to wear and sponsor their products rather than events or competitions. Few companies can afford the expense associated with these athletes. Bargaining Power of Buyers Two kinds of buyers exist: retailers and consumers. The retail sector is price sensitive. Nike does have its own retailer in Nike Town. However, most of its income is derived from selling into retailers. Retailers tend to have a difficult time differentiating

their experiences for the consumer. Since sports retailers have little differentiation in their retail outlets, margins tend to get squeezed as retailers try to pass some of the low price competition pressure onto Nike. Retailers like Foot Locker and Finish Line are learning first-hand that their consumers are spending less on things they dont need in the recession. This hurts them and it hurts Nike. Retailers are trimming inventory to avoid profit-eroding discounts, in turn hurting demand for Nike products. The poor performance by major retail partners leave Nike challenged, said analyst Sam Poser in a Marketwatch report. Retailers are working to decrease their inventory levels and increase their inventory turns (Marketwatch). With respect to its retailers, Nike also has a risk that it may be unable to sell excess products that it has ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair Nikes brand image and have an adverse effect on its operating results and financial condition. Conversely, if Nike underestimates consumer demand for its products or if its manufacturers fail to supply the products that Nike requires at the time Nike needs them, Nike may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships, and diminish brand loyalty. Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate Nikes credit risk, and impair its ability to sell Nike products (Nike Annual Report). A few large athletic footwear, apparel, and equipment retailers dominate the athletic footwear, apparel, and equipment retail markets in some countries with many stores. These significant retailers have been increasing their market share by expanding through acquisitions and construction of additional stores. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of Nike products, Nike may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales and revenues.

Ultimately it comes down to the consumer who is shopping around for a better deal. The consumer now maintains the control over the manufacturing so if a consumer wanted to find the lowest price on the same exact product then the consumer compares prices and then goes to the store that sells the shoe at the cheapest price. Such consumer price sensitivity is a potential external threat to Nike. Competition looks very different than it did even 20 years ago. The competitive forces are exponentially greater no matter what framework one chooses to use to analyze the forces. What Nike has that is far superior to any competitors is its core competencies of marketing, distribution, and technological expertise. (Manufacturing practices of Nike) Ultimately, however, Nikes success depends on its ability to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through aggressive marketing. Financial Analysis Since Nikes inception in the 1964, it has seen increasingly steady profits and growth. As one of the top retailers in athletic apparel and footwear, Nike has been able to keep its prestigious name by continuing to be leader in all areas of financial performance, including income, profits, sales, and revenue. To understand the financial performance of the well known company, Nike, we will assess its past and present financial analysis as well as forecast what the future has in store. Over the last five years, Nike has average a 9% growth in revenue, 12% growth in earnings per share, and increased their stock price by 60%, while most companies on average were well below these amounts. Nike has and will forever be embedded in our minds and the minds of those around the world as one of the most well known brands. By establishing such a great brand image, it has been able to increase its revenues from $13,740,000,000 in 2005 to $19,176,000,000 in 2009, even amidst a serious recession and economic struggle in the United States. Its ability to combat the great recession in 2008 and 2009 was by being a global brand. In the year 2009, United

States accounted for 42% if its revenues, while non-United States sales were 58%, contributing more of their sales to countries outside of the US. In the more recent years, Nikes growth and profitability has not been as strong and profitable; this pressure is due to the current economic problems that have arose in the years 2008, 2009, and continuing into 2010. The impact it has had on the financial performance of Nike can be seen throughout their income statements and balance sheets. People are spending less, which in turn decreases demand, decreases revenues, while the inventory in Nike warehouses are skyrocketing creating lower gross margins. The price of the raw materials necessary to create the Nike athletic apparel or footwear has also increased because of the increase in price of materials and the increase in the price of oil. Because of the financial uncertainty, it is also more risky to be taking on extra investments. Nike has suffered from all of these above mentioned reasons; however, because of its strong brand name and brand loyalty, it has still been able to see an increase in revenues from 2008-2009. To further discuss the profitability of Nike, it is important to look at the return on equity, return on assets, profit margin, and its operating profit margin. The ROE measures how well a company is using its investments to generate earnings growth; Nikes ROE for 2009 was 18.0%. This figure is much lower when compared to its 2008 ROE of 25.4% but still performing much better than its competitor Under Armour, with a ROE of 12.76%. The ROA shows how profitable a companys assets are at generating revenue. Nikes ROA for 2009 was 11.6%, which is also significantly lower than it has been over the last 5 years, but still outperforming Under Armour with an ROA of 9.06%. The profit margin is calculated by taking net income divided by revenue and is a very good indicator of how profitable a company is when compared to its competitors. In 2009, Nike had a profit margin of 7.75% compared to its competitor, Under Armour of 5.4%; this shows that Nike was much more profitable during the last fiscal year. The operating margin shows how well a company is doing to be able to pay for its fixed costs; a higher operating margin shows that the company has less financial risk. For 2009, Nikes margin was 9.69% and Under Armour had an operating margin of 9.95%. These two figures are very comparable and show that they are similar in respect to its

financial risk. The future of Nike is extremely promising. Looking at its historical performance, brand equity, and overall leadership in its industry, Nike will be able to continue performing at an optimal level. Because Nike is in the maturity stage of its growth and profitability, it will see diminishing marginal returns. Its profitability and income will continue to grow, but at a steadier pace. Analysts opinions of the future of Nike show that over the next five years, Nikes growth will be 12.33%, compared to the industry estimate of 11.87%. The earnings of Nike is also estimated to jump from $5.11 billion this quarter to $20.18 billion in 2011(yahoo.finance.com). Nikes future growth will be primarily due to its foreign market penetration. Nikes expansion into the foreign emerging markets of Brazil, Russia, India, and China will be imperative to its growth potential. In its recent letter to their shareholders, Nike states that it will focus on the four above mentioned countries, as well as Japan, the UK, and the US and continue performing in the seven most profitable performance areas of action sports, basketball, volleyball, running, men and womens training and sportswear to continue performing at an optimal level. Nike is, and will continue to be the industrys leader of athletic apparel and footwear companies. With its ability to merge into the foreign markets, keep its strong brand image, brand loyalty, and block out most of its competition, Nike will be able to see positive growth over the next to years to come. Business Level Strategy Nikes goal is differentiation. They create innovative and useful products for everyone from the average Joe to the professional athlete. Nike utilizes their brand image and reputation as a status symbol. The Nike swoosh symbol is recognized and automatically associated with sports excellence. Nike has a strong brand portfolio with several wholly-owned subsidiaries including Cole Haan, Converse, Hurley International, Nike Golf and Umbro. The company operates in more than 160 countries around the

world. The differences utilized by Nike are both tangible and perceptual. For example, DriFit technology has helped to create a stronger brand image backed by the even stronger idea of Nike apparel as a status symbol. According to the U.S. Athletic Retail, Nike has approximately 31% of the global market share of athletic footwear. Yet, it has only 7% of market share in athletic apparel. Nike addresses the whole of the athletic market and has been hugely successful in doing so. They provide footwear and apparel for the following: Running, Cycling, Golf, Football, Basketball, Soccer, Swimming, Baseball and Softball. The company has utilized professional athlete endorsements within their marketing campaign and this has greatly attributed to Nikes success. Nikes athlete endorsements began with Micheal Jordan and have since followed with other big name athletes such as Lance Armstrong and Tiger Woods. These professional endorsements have been key in helping Nike to stay the industry leader since 1989 in the athletic footwear and apparel industry. The company made waves in 2000 when they introduced the Nike Shox innovation. Since then, differentiation within the company has been taking place via segmentation with products such as Nike Free, Nike Sphere, Nike iD, Nike Women and Nike 6.0. Nikes mission statement reads, Our goal is to carry on [co-founder Bill Bowermans] legacy of innovative thinking, whether to develop products that help athletes of every level of ability to reach their potential, or to create business opportunities that set Nike apart from the competition and provide value for our shareholders. Today, Nike continues to seek new and innovative ways to develop superior athletic products and creative methods to communicate directly with consumers.

Nike Corporate Level Strategy Nikes corporate level strategy includes a moderate level of diversification. The

operational relatedness between businesses is very high. They share most information and technology needed to succeed. Nike falls into the category of related constrained, since less than seventy percent of revenue comes from a dominant business and all businesses share product, technological and distribution linkages. Nikes diversification is related because the firm builds upon or extends its core competency and resources/capabilities to create value. Also, economies of scope are incorporated. For example, Cole Haan line of luxury footwear and Bauer hockey utilize cost savings from capabilities and competencies that were developed in one of its businesses, Nike, and used in the others. Nike expects activity sharing among units to result in increased strategic competitiveness and improved financial returns, which it has seen. Moreover, intangible resources are difficult for competitors to imitate and/or understand. This allows the other businesses to gain an advantage immediately over competitors. Nike has many incentives to diversify, but most of them are internal. Nike has never left its core competencies. It is hard for you to tell whether or not Nike has diversified in the true sense of the term. Nike enters new markets and forms new parts of the company. If they acquire another company for their technology or resources, they always name these companies, NIKE. Nike has chosen to diversify for internal reasons like lower firm risk. Nike realized that if they were to stay exclusively in the athletic shoe market the risk of market loss was substantial. With competing companies like Reebok, Puma, and Adidas, Nike knew that they would lose market share in the shoe market. This reason forced Nike to look to different areas of the sports world. Nike has a great marketing and advertisement department. These departments looked for the next best athlete that would help sell Nike products. Tiger Woods was the answer. Nike landed the number one golf prospect in the world and diversified its products into the golf market. They produced things like golf shoes, golf clothes, and golf clubs. While producing golf equipment, they reduced the firm risk. An external incentive for Nike to diversify was greater profits. That is the number one incentive for any business. Nike saw that their core competencies could carry forward

into new markets. With the use of Tiger Woods, Nikes sales increased as if it was Nike using Michael Jordan all over again. This was a true sign Nike could transfer its core competency. They have since made major moves into the tennis market, golf market, and are constantly looking for the next. When it comes to resources for diversification no one has more than Nike. There biggest resource is its reputation. Nike goes into different markets and acquires struggling companies in those fields, and automatically the product that company produces is better. Not because it is different, but because now it is a Nike product. Nike has all the basic resources such as: money, technology, innovation, and image. These resources make it easy for Nike to diversify in the sports market. Outside of the sports market it loses a lot of its power. As long as they do not stretch their core competencies they will continue to make their efforts in diversification successful. Unlike many large corporations in the competitive market, Nike has not made many acquisitions or conducted many mergers. Acquisitions and mergers are not major focuses in their corporate strategy. A major strategy for Nike is however, creating strategic alliances in new areas of the sporting goods and apparel industry. In 1995, Nike acquired Canstar Sports Inc. in which all brands produced by this company were later consolidated under the Bauer brand name. Bauer has been a major player in the hockey equipment industry, an industry with big competition, and high price of equipment. Nike saw an opportunity to infiltrate this market by acquiring Canstar. This proved to be lest costly to enter the market and really added to the diversification of Nike. Nike later created a new business unit, headquartered in Montreal, Quebec, in which Nike and Bauer products would both be sold under their own brand names, but the people from Bauer were in charge of new product development and design. This has proven to be a great decision by Nike because Bauer has such a good reputation for manufacturing quality hockey equipment, that to discontinue the use of its name would be foolish. This is an example of a cross-border acquisition.

Nike has also done some restructuring to help gain the competitive advantage. Nike Inc. is very good at adapting to the changing market. When they see an opportunity to change for the better they usually take it. You see this in the huge moves they have made to make legal and humane working conditions a focus of their company, that they remain flexible and realize that they need the support of people to be successful. You also see this in they way that they enter into a new area of sporting equipment, and have an immediate impact. Part of this is obviously due to their very popular trademark, however, a lot of their success has to do with their willingness to restructure. Since acquisitions arent a big focus of Nikes, the way that they set up their strategic alliances is key to their success in new markets that they penetrate. Nike lets the best people produce the best products every time you see their name on something. You see this with they way they let Bauer keep its name. Nike has not been overly concerned with downsizing or downscoping, yet they are more focused on growth, innovation, and quality. Nikes international corporate-level strategy uses transnational strategy because it has a high need for global integration and a high need for local responsiveness. Nike seeks to achieve both global efficiency and local responsiveness. However, it is difficult to achieve because of simultaneous requirements for strong central control and coordination to achieve efficiency and local flexibility and decentralization to achieve local market responsiveness. Nike has to pursue organizational learning to achieve competitive advantage. If Nike does produce effective implementation of a transnational strategy, it is more likely to have high performance. When considering how to go Global and what to offer in global markets Nike should ask itself several questions. Nike should look at the quality of its products and make sure that they compare to available goods in the target foreign markets. Nike should also examine its price structure and see if it is inline with that of its competitors in the target market. Finally, Nike should ask who its major customers are in foreign target markets. Nike has recently attempted to enter foreign markets in other countries using several different marketing methods. Because of the majority of Nikes target markets are

younger people, they have focused on what younger people may want. These younger generations are sometimes referred to as the video game generation, because of their high level of video game use in their daily activity. Nikes goal is to create a global presence in the market place and instill brand familiarity with many of these kids. The idea being that when they get older they will want to purchase Nike apparel. Nike gained a global presence in the marketplace when it chose to create a strategic alliance with independent contractors in countries such as Pakistan and Indonesia, for assembling its apparel clothing. Nike found that it could produce a high quality product using very little payroll expense. In fact, in Indonesia, Nike pays a worker around $37.50 per month to assemble their products. The wages that Nike pays are just above the minimum wage, set by Indonesias government. Nike used cheap labor to assemble its products and to gain a competitive advantage over other apparel companies. Nike has also bought and changed firms through acquisitions as part of its global-level strategy. Nike used the acquisition method of entering into the global market when it purchased Montreal-based Bauer Inc. in 1995. Bauer Inc. employed over 500 union workers in the hockey apparel industry. Bauer was a very popular name in the world of hockey and seemed to be the best way for Nike to gain market share among Canadians and hockey fans abroad. Bauer was a natural way for Nike to enter into the hockey business with low barriers of entry because Bauer had already been an established leader in the hockey apparel industry. The hockey business then started to have troubles in the spring of 1997. Nike executives then told workers that they would have to reposition the business. This meant that they would move the manufacturing of hockey apparel to Eastern Europe or Asia to reduce labor costs. All of the 450 employees at the Bauer ice-skating and hockey-clothing plant in Cambridge, Ontario were laid off by 1998. This is an example of how global market strategies shape and reshape the entire world. More advanced countries such as Canada lose jobs and employment within their country while third world countries gain them.

Bibliography Cheng, Andria. Nike profit slightly higher; sales drop on softer demand, September 30, 2009. http://www.marketwatch.com/story/nike-profit-inches-higher-salesdrop-2009-09-29. DAveni, Richard A., Hyper-Competition: Managing the Dynamics of Strategic Maneuvering. New York: Free Press, 1994. Dealing with ION, Dealing with the Competition, http://www.scribd.com/doc/19074701/Dealing-Wit-ion Nike Annual report ending May 2008, Form 10-K, Securities And Exchange Commission; Washington, D.C. 20549 http://www.sec.gov/Archives/edgar/data/320187/000119312508159004/d10k.htm#tx162 66_13 Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: The Free Press, 1980. SWOT Analysis Nike, Inc. http://marketingteacher.com/SWOT/nike_swot.htm Under Armour Investor Relations Report, 2010 http://investor.underarmour.com/investors.cfm US Athletic Retail Market Report, 2009 Edition, http://www.prlog.org/10333892us-athletic-retail-market-report-2009-edition-new-report-by-koncept-analytics.pdf. Van Dusen, Steven. The Manufacturing Practices of the Footwear Industry: Nike vs. Competition, University of North Carolina. Unc.edu/~andrewsr/ints092/vandu.html.

Wright Report: Nike, Inc. Company Profile http://wrightreports.ecnext.com/comsite5/bin/comsite5.pl?page=report_description&repo rt=COMPANY&cusip=654106103