Nike & Reebok
...h readily from one product or brand to another. To prevent them from doing so, manufacturers attempt to raise brand awareness and build brand loyalty among consumers. A strong brand image typically gives a manufacturer more pricing flexibility by creating perceived switching costs for the consumer. Threat of New Entrants Because of the high initial capital requirements needed for up-front advertising and research and development, barriers to enter the footwear industry are high. In addition, it is difficult to achieve economies of scale in production due to the difficulties of penetrating the market which is dominated by the few major players such as Nike and Reebok. Also, it is hard to achieve product differentiation in terms of brand identification and product difference, since the major players set the trends. As a result, threat of new entrants is low. Threat of Substitute Products The industry is constantly changing the products to deal with flashy fads and the “hottest” fashion. Multipurpose shoes such as “cross trainers” may impose a possible substitute to the currently highly diversified range of athletic shoes. However, there are not too many close substitutes to athletic shoes. Therefore, the threat of substitute is low. Effects of General Environment on Footwear Industry Demographic Demand is driven by population growth and demographic trends. Obviously, when the population rises, so does overall demand for footwear. However, the US population is growing at only 1% per year; this is why apparel and footwear companies are looking overseas for future marketing opportunities. According to the US Department of Commerce, the world’s developing countries will grow more rapidly than developed countries. In 1990, approximately 78% of the world’s population lived in developing countries. It is expected to be 81% by 2005, rising further to 86% by 2050 (S&P’s Industry Survey-Apparel and Footwear 2005). Therefore, it is predicted that demand for footwear will be substantial in developing counties. Demographic trends within the United States can also affect the quantity and type of footwear demanded by consumers. For example, as baby boomers approach retirement, they have shifted their spending priorities to needs and desires, such as healthcare and leisure activities other than footwear. They are also more likely to buy comfortable shoes rather than the latest fashions. Changes in consumer attitudes and preferences also have an important impact on demand for footwear. Manufacturers must adapt to lifestyle and fashion trends by making the necessary alterations to their product lines. There are 60 million people born between 1979 and 1994, known as Generation Y, the Millennium Generation. These are the children of the baby boomers, and they are estimated to influence the spending of approximately $200 billion a year. Preteen and teen markets tend to be particularly fashion-driven. To effectively target this market, footwear manufacturers have to closely monitor and anticipate the styles and items that these consumers will like. In addition, although teenagers often are perceived as fickle, they tend to be loyal to footwear brand names. According to a survey by technology research firm Forrester Research, 69% of teens said that, when they find a fashion-forward brand they like, they stick with it. Thus, a strong brand name can help attract and retain the teenager customers. Technological Technological developments related to the Internet are transforming the manufacturing and retailing of footwear. This trend is changing the relationship between suppliers and retailers mainly benefiting both. For instance, new technologies are now available to customize products for specific customers at affordable prices. Internet-based communication networks can also enable manufacturers to share design plans with retailers in order to determine which goods are most desirable and which should be altered or discontinued. In addition, automatic replenishment uses point-of-sale computer technology to record each sale, update inventory, and share this information between retailer and vendor. Although technological developments have many positive effects on the operation of the industry, new technologies are also expensive. It is believed that in a consolidating retail industry, rising technological costs will prove burdensome for smaller firms, while larger players will gain a competitive advantage by their ability to meet them. Conclusions With the economic recovery and population growth, the apparel and footwear industry will benefit from a higher level of consumer confidence and spending. We expect branded apparel and footwear companies offering fashion-right products at attractive prices to outperform the overall industry in the next three years. The best performances are likely to come from companies with strong brand recognition with an upscale product positioning. The footwear industry faces a highly competitive but improving environment. Momentum has been building at a fairly steady pace since the second half of 2003, and we anticipate modest gains in the following a couple of years. Casual shoes will continue to gain market share at the expense of formal footwear. Nike and Reebok are expected to have a modest growth in U.S. footwear sales, while sales abroad are expected to continue growing rapidly. In short, the apparel and footwear industry will be attractive over the next three years. Competitive Environmental Analysis Current Strategies Nike and Reebok are the top two major players in the athletic shoes and apparel industry. Both companies focus at the high end of the market, offering prestigious merchandise perceived to be of high-quality by the consumers, and maintain relatively high prices. The high prices are supported by heavy emphasis on consumer research, research and development, and product/brand image. Nike’s current strategy is focused strictly on product development for the athletic footwear and apparel, as opposed to Reebok, which focuses on diversification. Strategic Intent Nike focuses on technological innovation by investing substantially on research and development. It maintains its brand image through extensive advertising campaigns. Its continued growth can be attributed to successfully targeting the most profitable segment of the athletic shoe/apparel industry, consumers between the ages of 12 to 34. This age group purchases athletic shoes more frequently and are willing to spend more on shoes for fashion and coolness. Reebok values its people as its greatest asset and empowers them to be creative and innovative. Its commitments in engaging in responsible environmental stewardship and standing up for human rights have a positive impact on the company’s reputation. Reebok’s brand image of quality and prestige justifies its pricing strategy. As opposed to Nike, Reebok’s primary customers are consumers over 45 years of age and are mostly women who are price conscious. Strategic Mission Both companies aim to maximize shareholder value with the following strategic mission: Nike: “to bring inspiration and innovation to every athlete in the world. Reebok: “to make a difference”, “to be the leader in the design and development of authentic products and services”, “to influence the athletic lifestyle trends of the world”, and “to be committed to excellence and innovation” Capabilities Nike’s success can be attributed to its strong brand image resulting from its aggressive marketing campaign, commitment to product innovation, healthy financial position, and established distribution channel. Reebok’s success can be attributed to its brand image, technology, human resources, and healthy financial position. As opposed to Nike, only recently did Reebok made use of famous athletes to endorse its products. Core Competencies Brand image and technology, or commitment to product innovation, are the core competencies of Nike and Reebok. Brand image is valuable as it cultivates brand loyalty which often results to high switching costs; it is difficult for its competitors to imitate and rare as it can only be attributed to the particular company; organized to be exploited as it is intangible in nature. Technology is also valuable as it enables the company to command above average prices; it is difficult for its competitors to imitate and rare as it usually requires intensive capital investment; and it is organized to be exploited as it is usually engraved in the company business processes and company culture. Both companies target the higher end of the market. To be able to justify the higher prices, they have to be innovative not only in design but also in functionality. This requires considerable investment in consumer research and research and development. However, having a superior product is not sufficient. An aggressive marketing campaign is needed to raise brand awareness and build and maintain brand loyalty. How is the current strategy incorporating these competencies? Given the intense competition in the footwear industry and that demand is driven by demographic trends, Nike’s commitment to product innovation and its strong brand image makes it the leading player in this industry. Its undivided attention in the athletic footwear and apparel industry, the significant amounts invested in research and development, and the consumer researches it conduct, enables Nike to remain on the top, by anticipating and providing what the consumer wants before they know it. Its strong brand image can be credited to its aggressive marketing campaigns, which use famous athletes who are proven winners to endorse Nike’s products. Reebok is following a similar strategy. It too is dedicated to brand image and innovation, except that it does not only focus on the athletic footwear. To protect investors’ interest by minimizing risks of financial lost in case there is instability in the market; Reebok has diversified its portfolio. Its marketing campaigns use athletes who are inferior relative to Nike’s; this could be responsible for its lower perceived image and its lesser ability to command higher prices relative to the top player. Internal Analysis Tangible Resources Financial Nike: Refer to Exhibits 2, the continuous increase in sales and gross margins from 1999 to 2004 shows that the company is still growing and reflects a healthy financial performance. However, the percentage of net income compared to sale is relatively low, which could mean that management may not be managing operating costs efficiently. In general, earning per share has increased during these periods which indicate an increase in the shareholders’ value. From a liquidity perspective (Exhibit 2), the company is standing in a good position. The debt structure of the company is conservative to the point that it does not jeopardize its financial health. Nike has a huge working capital that allows it to implement short-term strategies quickly. Inventory and receivable management do not show any problems. Reebok: Refer to Exhibits 34, the decrease in sales and net income show that the company has faced some difficulties in 2004. However, the earnings per share have increased. This is a positive indication of increasing shareholders’ value. The company is in good liquidity position as per Exhibit 4, however, its high leverage may create liquidity problems in the future. Inventory and receivable management does not show any problems. Comparison: From a financial position perspective, these two companies are very competitive. However, Nike is more liquid than Reebok; less levered than Reebok; have a higher return on investment and equity, sales, gross and profit margins, and working capital. Contrary, Reebok is managing its inventory just a bit better than Nike. Receivable management is almost the same. Organizational Nike: The corporation’s organizational structure, management, controlling, and responsibility are categorized into three levels: board, executive, and operational levels. The board level formed a corporate responsibility committee responsible in making recommendations to board of directors in regard to labour and environmental issues, community affairs, charity and foundation activities, and diversity and equal opportunities. The executive level sets policies and oversees the work of the operational level. The operational level of the organization is in charge of performing day to day business activities and includes the following departments: labour and environment, safety and health compliance, community and government affairs, corporate communications, legal, and human resource. Reebok: Although information pertaining to the organizational resources of Reebok is not disclosed any where, our research and readings about the company have made us conclude that the organizational structure of Reebok is almost the same as Nike. Physical Nike: Nike’s headquarters is located in Beaverton, Oregon, USA. It is a 176 acre facility, with 16 buildings. Nike also leases similar facilities in Hilversum, The Netherlands for Europe, Middle East, and Africa operations. Furthermore, Nike has three significant distribution and customer service facilities in the US. Leased distribution facilities for other brands and subsidiaries are located in the US and many parts of the world such as Tomisatomachi, Japan, and Lakdal. In addition to the above properties, Nike leases about 22 production offices, 100 sales and showrooms, 65 administrative offices, and 330 retail stores worldwide (Exhibit 12). Reebok: Similar to Nike, Reebok, in addition to its U.S. operations, also operates internationally. Reebok’s headquarters, a 42 acre campus, is located in Canton, Massachusetts. It operates about 223 factory direct stores and five company-owned concept stores in U.S., and 79 factory direct stores in Europe, Canada, Mexico, and Japan. Reebok coordinates its international sales through its headquarters in Canton, Massachusetts that is responsible for the Latin American regional operation; its facilities in Bolton, England is responsible for its European, Middle Eastern, and African operations; and Hong Kong is responsible for its Far East operations. Comparison: Although both companies appear to have about the same physical resources, the value of Nike’s physical resources is more than Reebok. Technological Nike: Nike’s technological resources consist of research lab, footwear, apparel, and equipment. The area of Nike’s research lab is 1300 square feet with research equipments to study Biomechanics, physiology, and sensory/perception. The measurement equipments that researchers use include variety of muscle sensors, pressure platform, breath analyzer, foot scanner, and thermal imaging devices. High-speed video cameras that have the ability to capture 1,000 frames per second and scanners that produce 3D digital images are among the equipment. In addition to these equipments, Nike possesses testing surfaces such as basketball hardwood, artificial soccer turf, and 70-meter sprinter’s track runway. Nike has adopted a testing culture in its research lab, and uses every opportunity to collect information in order to enhance its level of technology. Exhibit 11 shows some scientific techniques researchers use to measure their findings. In addition to the above technological resources, Nike owns trademarks such as Nike and Swoosh Design. It also possesses worldwide licenses such as “Air” technology, and Pressurized gas encapsulated in polyurethane. In addition, Nike owns different US and foreign patents for “Nike Air,” covering components, features and designs. Reebok: Reebok’s technological resources consist of product development centers in China, Taiwan, and Indonesia. Reebok’s three most significant technologies are DMX, The Pump, and 3D Ultralite. Another technology Reebok uses is the “Play Dry moisture-management system” that keeps the wearer dry. In addition to the above technological resources, Reebok owns trademarks such as Reebok, Rockport, JOFA and KOHO, and other property rights such as using the Greg Norman name and Logo and the CCM trademark. Reebok also has the right to use the Ralph Lauren name under license and right to use certain marks of the NFL, NBA, NHL and MLB. Comparison: Both companies possess substantial amount of technological resources through out the world. However, Nike seems to keep up with the new technological equipment and techniques more than Reebok. Human resources Nike: Nike employs approximately 23,000 people worldwide, including manufacturers, shippers, retailers and service providers, nearly one million people help bring Nike to athletes everywhere. Reebok: The information about Reebok’s HR is not currently available. However, based on our general understanding about this company, Reebok employs thousands of people worldwide and has almost the same human resource as Nike. Innovation Nike: Nike is committed to giving athletes of every make, model, and body style the very best performing products. Their mission is “to bring inspiration and innovation to every athlete in the world”. Nike’s most significant technology is the Nike Free, a shoe that imitates barefoot movement. Reebok: Strong emphasis is placed on the technology of products; focusing on custom fit, cushioning, stability and lightweight features in footwear products, and on comfort and moisture management in apparel products. This is accomplished by product research, development and design activities to develop technologically advanced athletic and fitness footwear. Reebok’s most significant technologies are DMX, The Pump and 3D Ultralite. DMX technology provides superb cushioning using a heel-to-forefoot. It also designs and markets casual footwear, apparel and accessories for non-athletic use. It designs, markets and sells products under a number of different brands. Reputation Nike: Improving the working conditions in Nike’s supply chain contributes positively to its reputation. However, it still remains a major challenge. Nike is the target of one of the most active global campaigns for corporate accountability. As a shoe manufacturer, Nike has an excellent reputation worldwide. Rebook: Reebok was associated with sweatshops in the past. However, today, the company is a strong activist for human rights. In April 2004, Reebok's footwear division became the first company to be accredited by the Fair Labor Association. Also, Reebok holds an exclusive right to manufacture and market both authentic and replica uniform jerseys and sideline apparel for NFL teams. Reebok overall has excellent reputation and is recognized worldwide. Value Chain Analysis As per Figure 3 & 4, a detailed analysis indicates that both companies have a highly integrated system despite the fact that outsourcing is evident through-out the whole value chain. However, because Nike has stronger support activities perspective (Financial, technological, and physical resources) compared to Reebok, it is more capable to support its primary activities to function more efficiently. The capability and efficiency in Nike’s value chain has created core competencies that are valuable, rare, costly to imitate, organized to exploit, and hard for Reebok to catch-up with Nike. Firm Performance Nike and Reebok have always been in competition since the 1970’s. This section illustrates which company comes out on top financially by examining three things: margins, sales growth, and performance valuation. Margins VS Industry Bench Mark Exhibit 5 compared gross, operating, and net margins for both companies and industry as 2004. Nike Reebok Industry Gross margin 42.9% 40% 40% Operating margin 13.63% 7.62% 8.61 Nike performed better in all categories compared with both industry and Reebok. Sales Growth In Nike's most recent quarter, overall sales grew by 13.90% as of 2005. Throughout the first two months of its fiscal year in 2005, revenues were up by 10.29% to $1.26 billion (Exhibit 5). What's interesting about Nike's sales growth is that even though the company is finding its shelf space squeezed at one of its biggest domestic footwear distributors, its international business is booming. Obviously, the U.S. athletic footwear market is crucial to Nike, and it's working to find replacement distribution points for the lost Foot Locker space. But at the same time, it's keying in on its huge international business and has been making strides overseas. Reebok, on the other hand, is in the opposite position. Being relatively smaller compared to Nike, with intentions to rebuild its brand and reclaim the glory it once had, it's focusing a great deal of energy on its U.S. footwear sales. And for good reason, given the success it's found with new its Foot Locker. Reebok's total revenues for its first quarter increased 11.20% as of 2005 (Exhibit 5). Reebok's looking strong leading into its new fiscal year, but Nike's managing to grow its overall sales despite tough stateside conditions. Given the industry’s average sales growth of 11.40% in the recent quarter, Nike leads, as it is the top nine in quarterly revenue growth as of 2005 (Exhibit 8) Performance Valuation Reebok is trading at a P/E of about 13.64, compared to Nike’s 19.50 P/E ratio (Exhibit 7). Nike’s share price increased by 0.60%, which pla...