nike strategic audit
...tempts to reach Generation Y, Nike needs to bring Nike sandals and boots into the market. 7. Potential market of new product (i.e. sport watches, eye wear) Nike not only sells athletic shoes, but also accessories, sports equipment, and clothing for men, women, and children. For expansion in equipment division, Nike offer products ranging from watches, eyewear, sport balls, protective equipment, socks and bags. In 1997, Nike launched Triax watches with instant success that two million sport watches were sold by mid-1999. Later on, Nike plans to offer six to ten new styles of watches three times each year. It is the evidence that there is potential market for Nike products with its brand reputation, innovation and marketing strategy. 8. Increased popularity of online sales We are living in the age of technology, and Nike has positioned itself to be a part of the wave in the Internet revolution as per Phil Knight’s strategic direction (David F.R., 2001). Internet shopping has become very popular in today’s culture and also very important aspect of where Nike’s increased sales comes from. Through this advanced technology, Nike creating a personable feeling for its online customers that allowing them to personalize their athletic shoes by selecting shoe colors and a personal ID called NIKE_ID. The service carries only a small fee, but it leaves the customer feeling self gratified in the customization of their own personal purchase. In addition, Nike makes use of the technologies together with the World Wide Web by getting the customers’ profile on the web for its Research & Development process. 10. Increased popularity of soccer and golf Since the entrance of Tiger Woods on the golf scene and the increasing popularity of soccer, related products have come under strong demand. To take advantage of the golf explosion, they have introduced Nike golf clubs, shoes, balls and apparel. In addition to promoting and marketing these new products, Nike has even taken over sponsorship of its own “Nike Tour”. In spite of golf gear, Nike now offers a wider selection of soccer equipment such as cleats, jerseys, shorts and balls. Threats 1. Saturated market The athletic footwear industry is a challenging and saturated market that the growth is further slowed down by intense competition, fashion trends, and price conscious consumers. There is also very little room for new product innovation and growth of market share especially the market leader - Nike. Nike is now competing with other athletic companies as well as companies that just sell clothing or other types of shoes. If all of these companies merely gain a small percentage of the market, Nike will be one of the main companies to start losing market share. In response to this threat, Nike would focus on keeping their market share from not stealing away by competitors and put more efforts on a broader market. This would include the younger generation that is interested in sports as well as extreme sports. Nike needs to make sure that not only stay abreast of the athletic shoes market but also are competitive in the athletic apparel market 2. Strong competition with Reebok & Adidas There were at least two-dozen other competitors including Reebok and Adidas, the major competitors of Nike under intensive competition. Therefore, if Nike wants to keep the number-one position, they need to contribute success by contracting the manufacture of shoes from low-wage factories in the Far East so as to release resources for its strength like marketing, image building, and R&D. 3. Foreign monetary issues (inflation, exch. rates, Euro) As stated previously, Nike has a large amount of business overseas. So when foreign countries become unstable, Nike’s international markets can shrink considerably. For example, poor economic conditions in 1999, there was significant drop in foreign markets of Nike such as revenues in Japan and Canada have dropped by 37% and 22%, respectively. Inflation and unemployment appeared too. Nike also has witnessed dramatic changes in shoe sales in Asia and the Pacific Rim, Latin America, and Russia. The problems forced people to buy the necessities only, and unfortunately, Nike does not rank high on their lists of necessities. 4. Brand loyalty customers The concept of brand loyalty has fascinated the marketing world for almost a century. Brand loyalty is the tendency of someone to repeat purchase a brand because they prefer it to others and must really want the brand before he/she can be considered loyal. The loyalty would be so immense that the consumer would, rather not buy the product at all if his brand is not available, instead of replacing an alternative brand. For example, loyal Reebok-wearing customers were blindfolded and made to wear Reebok being told that they were trying on the opposite brand. They said the Reebok shoes were more comfortable only to discover later that they were wearing Nike. This prove that the effect of brand loyalty that was achieved either through effective advertising, positioning or prior experience of usage of the brand. 5. Laws, Regulations and Governmental Influences Laws, regulations and governmental influences are critical factors always affect the way that companies doing business and Nike was affected too. Therefore, Nike is always tries conserve resources, cut waste, and reduces their impact on the environment. Regulations like EEOC (Equal Employment Opportunity Commission), OSHA (U.S. Occupational Safety and Health Administration), and EPA Environmental Protection Agency) assure that safety standards are maintained for Nikes’ employees and natural environment alike. As a whole, the apparel industry is not heavily regulated. Because all of Nike's manufacturing is outsourced, the subcontractors are more directly responsible for assuring environmental safety and quality working environments. However, Nike has not been able to avoid violations that used to be responsible by subcontractors. 6. Increased competition in Europe Increased competition in Europe has become a threat to Nike that pursuing its position as a main competitor in the international market. However, Adidas is the number-one seller of athletic shoes and apparel in Europe and number two internationally. Some analysts believe that doing well in the European market is vital to the continued success of companies in the athletic shoe industry (David F.R. 2001). Therefore, if Adidas is currently the number one contender in its home country, it has already at a competitive advantage over Nike. Thus, Nike has strategically positioned business operations throughout European countries and enables them to gain a competitive advantage. 7. Market Fluctuations - change of fashion and sport trends Nike leads the apparel division among industry competitors but not as a whole. Due to increased emphasis by consumers on fashion in relation to sportswear, Nike has had to make progress to appeal to a fashion market. Nike apparel line is not only being challenged by typical industry competitors such as Reebok and Adidas, but also by clothing and accessories retailers such as GAP and Abercrombie & Fitch. Nike should plan on initiating five structures within the apparel division to focus on the following areas: Women, Men, Kids, sports graphics and caps. Sales in the overall athletic footwear industry remain stable which the global variance in market balances the seasonal fluctuations. Typical trends in seasonality appear for spring apparel, the back-to-school season, and the Christmas holiday season. 8. Decrease in athletic shoe market & shift to work boot and sandals Nike’s R&D found that a shift from athletic shoes to boots and sandals would become a threat for them. It is also an opportunity for another company who market those products. Nike should try to incorporate those products into their development cycle or through the acquisition of businesses who already market those products. (http://www.nike.com/nikebiz/nikebiz.jhtml?page=11) Industry Analysis – Five Forces Analysis Bargaining Power of Buyers: Buyers have some power in the fact that switching costs are low. There is a very large group of potential customers, however, who buy individually and not as a group. Therefore, there is no negotiation on price although buyers do have a wide variety of choices in deciding whether they purchase a certain brand of a product. Consumers loyal to Nike brand shoes are becoming more price discriminating buyers. Nike uses a marketing strategy of changing its shoe designs frequently to keep them fresh and in style, creating demand. Retailers in line, markdown the prices of old styles to clear room for the next model. Consumers have learned that if they wait until a new style of shoe being introduced, there is an opportunity to pick up an existing style on discount. For brand loyalists, Nike’s outlet stores which specialize in discounted models, are a valuable alternative to shoe store retailers. Consolidation in the retail segment is having a deep effect on Nike’s business. Powerful superstore chains are changing channel dynamics. Nike has found that while it still holds the largest part of the athletic shoe market, increasing influence of sports equipment superstores is changing the manufacture retailer buying relationship. Nike can no longer count on dictating all of the terms of a deal, they now have to work harder to get sign big retail contracts. Bargaining Power of Suppliers: Nike keeps operation costs down by subcontracting the supply of raw materials and manufacturing to competitive firms in Southeast Asia and Mexico. There is no shortage of raw materials or manufacturing capacity. The subcontractors in Southeast Asia often produce raw materials for athletic, casual, and dress shoes. By making use of subcontractors that produce both the raw materials and the finished shoe, Nike has the advantage of keeping production costs very low. Basically, suppliers have no power or influence to affect prices. One disadvantage for Nike is that this business relationship makes the switching cost between suppliers high. Nike is attempting to strategically direct part of its production away from Southeast Asia to its subcontractors in Latin America and Mexico. One reason is that Nike could potentially supply the American market more quickly and efficiently from Mexico than from Southeast Asia. Regardless, Nike still mainly focuses on its Southeast Asian subcontractors because of their efficiency and competitive low production costs. The Threat of Potential Entrants: Although there are no regulatory policies, tariffs, or trade restrictions to prevent entry, the huge expenses of research and development (R&D) becomes a prevention to enter the athletic footwear industry. Nike has invested billions of dollars in establishing brand names that recognized by customers and even loyal to Nike. This is an effective entry barrier. Moreover, Nike also spend huge budget on advertising and marketing that that is very expensive for an unknown, untested new entrant to compete directly with Nike. Another difficulty that new entrants face is high capital investments, which are needed for manufacturing. Casual footwear is not costly. However, there is some specialized technological “know-how” in athletic footwear that is not readily available (like Nike Air, Nike Shox, etc.). Buyers are also very attracted to brand preference and loyalty. In spite of this, a small number of young, relatively small firms have recently enjoyed some success. Competitors who under price Nike and focus their marketing and advertisement on select market niches. Some major fashion houses have enjoyed a success with their own sneakers. Companies such as DKNY, Tommy Hilfiger, and Ralph Lauren already have a strong brand name and image, affording them a small market advantage. The industry - Rivalry among Existing Firms: The rivalry is very fierce with many companies competing for sales. Lots of money is spent on marketing and promotions through different channels in order to communicate to the young demographic group of consumers who spend the most money on their products. Growth has also slowed in the athletic shoe industry, however new markets are emerging with high growth rates. For examples, the extreme sports market and the women market. Nike leading the athletic shoe market with 47% of the US and 39% of the worldwide. In the past, Nike’s major competitors have lacked a focused management strategy. Reebok was uncertain whether they wanted to be an aerobics and women’s sport sneaker company or a junior Nike. Adidas is sprinting back into contention and Reebok is pumping new money into advertising and technology to differentiate its products. When you are number one, everyone wants to knock you out of the first place. Athletic shoe manufacturers realize that they can no longer sit back and re-issue old styles in new colors. In an attempt to differentiate their shoes, they have had to continuously invest heavily in R&D to develop advanced technology. The athletic footwear market will be more volatile in the future. Product demand also has a seasonal component, which affects rivalry. Any athletic shoe technology fails or a marketing campaign fails, manufacturer will find difficulties to recapture the lost market share. The Threat of Substitutes: Due to growth in non-traditional sports and casual wear, competition and marketing is fierce to get customers to switch. Statistically, people have begun to buy more “brown shoes” and less athletic style shoes. Industry trends show that this style of shoe is replacing the athletic shoe as an “everyday” shoe. Young discriminating consumers are substituting colored shoes for the basic black and white athletic sneakers which switching costs is very low. Substitute products are readily available, attractively priced, quality comparable and simply some feature differentiation. Finally, another substitute is fashion and sport styled sandals. Sales trend data indicates that sandal sales have been steadily increasing over the past 5 years and will continue to grow in the future. Relative Power of Other Stakeholders: Stakeholders including different groups who are interested to the company such as governments, local communities, creditors, trade associations, special-interest groups, unions, shareholders and complementors, etc. They have great power to force a company in adjusting their strategic decision or way of operations and with serious effect. Nike did face with boycott by publics because of their low pay to Indonesia and Vietnam factory workers. The cheating wage and violations of labor laws brought attention and query to the corporate governance and social responsibility of Nike. In order to avoid problems extension and further damage in its brand image, Nike spent a lot of effort and money to hire different professional (e.g. auditor, researcher, consultant, etc.) to investigate the issues. Nike announced updated reports and apologizes to the publics. In addition, they took immediate actions in compensation, more programs in labor practices, new policies in monitoring the overseas labor welfare system, provides necessary training, etc. From this, Nike learned an importance lesson about the serious damage in overlooked the labor issues and put great concern in future social responsibility. Internal Environment: Strengths and Weaknesses An important part of strategy planning is to scan the internal and external environment related to the firm. Environment factors are classified as strengths (S), weaknesses (W), opportunity (O) and threat (T), such analysis is referred to as SWOT analysis. This analysis could provide helpful information in matching the firm’s resources and capabilities to the competitive environment it operates in. The analysis started with the firm – Nike’s internal strengths and weaknesses as summarized in the following IFAS table. Strength Strategic Acquisitions Acquisitions, although not a key internal strength, still play an essential role in expanding the business. Nike has done a good job in this aspect. They would chose companies that are align with their core business and business philosophy. For example, the American luxury brand Cole Haan which offer casual luxury footwear and accessories. Cole Hann focuses on craftsmanship, design innovation and character which are in line with Nike’s innovative way of thinking. Brand name recognition Nike name and logo has always been well-know to consumers. When determining the strengths of Nike, names that can arouse consumers’ interest play a very important part. As a result, score 4 was given to indicated the importance of the brand name recognition. This consumer awareness and brand name recognition is unsurpassed in the athletic footwear and athletic apparel industry. Especially the Nike’s “Swoosh” symbol is easily recognize no matter you are 7 years old or 70 years old, just like the famous “Golden Arch” of McDonald. As Lee (2000) said, “Nike Inc. didn’t have to do a lot of research to figure out what kids thought was cool. The answer was ‘Nike’. For years, the brand was a mainstay of Young & Rubicam’s annual survey of preferred labels among teens.” The important thing is the company should use the symbol selectively in order not to over expose the “Swoosh”. Endorsements Over the years, Nike has a lot of successful campaign of endorsement that provide promising result in terms of sales volume. Customers usually tend to associate with people such as professional athletes and those who have status and they chose their ensemble to display their favorite player or team. The correct utilization of endorsements. For example, the famous Michael Jordan’s effect which create a basketball phenomena. Nike received press coverage through Jordan’s decision-making process and continues to make press regarding the impact of Jordan’s return. Nike was able to capitalize on this strength by debuting a new shoe – Air Jordan XVI and by making new commercials with Jordan that hit the airwaves. Nike has done very well on endorsing the top athletes which contribute an essential strength within the company; therefore a score of 3 is given. Overseas manufacturing at low-wage factories Nike does not manufacture its own products; they chose to outsource this responsibility to manufacturing companies worldwide, especially to developing countries where wages are low. By doing this, Nike can reduce the expenditures and allocate the resource to other key departments including Marketing, R&D and distribution etc. For the reasons that they do not have the burden of the high operating cost of running their own factory such as purchasing equipments, paying workers’ wages and all operating expenses associated. International distribution channel Being a global company such as Nike, it is essential to have a wide coverage distribution system in order to sell their products in a worldwide basis. Nike’s products are sold all over the world in more than 200 countries outside the United States. And also operate 24 distribution centers in Europe, Asia, Australia, Latin America, Africa and Canada, as well as distribute through independent distributors and licensees. In the United States alone, there are more than 20,000 retail locations across the continents. Products include not only shoe but also clothing, sport equipments and accessories. Apart from the U.S. there are more than 30,000 locations which sell Nike’s products. (Nike Financial Report) Nike is also team with Hewlett-Packard to formulate Nike Supply Chain (NSC) project in order to create a consumer-driven supply chain. The framework for decision-making also provides sustainable competitive advantage which enhances Nike’s global brand leadership. Having a well developed distribution channel is consider a relatively critical internal strength for Nike as shown at IFAS table, the weighted scored, 0.15 is among the top four. Basically, distribution channel help Nike to reach all of it customers and to make Nike’ products available everywhere. Having an high exposure rate is also essential in stimulate sales in order to generate more profit. Management style and corporate culture Another internal strength of Nike is their management style and corporate culture. Phil Knight, Chairman and CEO of Nike has once said, “Play by the rules, but be ferocious”, this truly reflect a supportive management style in a positive manner. (David, 2001) Beside, Nike has always embraced a culture rich corporation with employees’ loyalty and team spirit. People can see Red “Swooshes” floating almost everywhere from screen saver to coffee cups and even at the ankle of Nelson Ferris, Head of Nike’s corporate education department in the company headquarters in Beaverton, Oregon. The management style and corporate culture also enable Nike to response quick to market change. Such as the incident in 1985, when Nike got hit from Reebok multicolored aerobic shoes, area that Nike has been neglected. Nike than decide to reinvent their business and culture to become highly motivated in regard of selling sports and a “Nike way-of-life”. The company also restructured its marketing campaign which focus on image rather than just product advertising. This strategy led to the “Just Do It” mantra. Since then, Nike has been striving towards an inner culture that reflects this mantra. In addition, Nike’s management also works closely with its employees. Employees are constantly brief with update industry information, management sends weekly e-mails to update employees on the recent successes of Nike-sponsored athletes, and often hosts spokespeople to motivate and thank its staff for contributions to the sport world. For a company to be successful, people and management style have always been an important issue. Nike has done this in their way and in a successful way, too. Marketing Expertise Nike has done an excellent job in Marketing its apparel and equipment and its marketing expertise has also proven to be very successful. Nike’s brand images, including the Nike name and the trademark “Swoosh”, are considered to be the most recognizable brands in the world. Thanks to their “Head Coach – Phil Knight” who has a vision that guide the organization through changes. As Phil Knight (stated by Goldstein & Lennon, 2001) once said: “For years, we thought of ourselves as a production-oriented company, meaning we put all our emphasis on designing and manufacturing the product. But now we understand that the most important thing we do is market the product. We’ve come around to saying that Nike is a marketing oriented company, and the product if our most important marketing tool.” (http://www.lehigh.edu/~smr8/NikeMarketing.htm.) Nike has then change from a production-oriented company to a marketing-oriented company. For the reason that marketing is all about getting your customers to buy your products and introduce your company to the public as well. Through marketing, Nike response to customers’ wants and needs and to foresee change in the environment. Throughout the years, Nike has had many successful advertising campaigns which always create to reflect public opinion. Nike also sponsor sporting event, the Nike name and trademarks appeared everywhere from players’ shirt, pants and hats to stadium banners and walls. This certainly re-enforce the brand’s image by putting the “Swoosh” in every visible places. Another aspect that Nike has done very well is the use of celebrity endorsement as mentioned earlier. Such as the very famous Michael Jordan effect after he became an official spokesman for Nike in 1984. The campaign successful capture the youth market with the slogan of “Be Like Mike” Nike also pays attention to the change in market place, like the emergence women market. They also recruit women athletes to gain the attention of the female market. Some of the famous name are Monica Sele and Mia Hamm both women represent strength and a positive role model for young girls and again, Nike is in the hope of creating another influential effect just like Mike. Within the organization, Nike also has a strong foundation for marketing research which enhances the skill in marketing its apparel and equipment. Nike would conduct marketing research on a continual basis in order to assist and maintain the company’s position as leader in the athletic footwear and apparel industry. Strong financial return / large percentage of market share The major reason why Nike is consider a top firm in the industry is their health financial position. This can be indicate by the constant growth in profit figure. The revenues for year 2002 and 2003 grow from 9,893million to 10,697million which indicate they ate generate more sales over the world. The strong financial position can be shown in some comparison of financial ratios. Nike’s working capital is 2321.5 million in 2002 and increase to 2664.7 million in 2003. Nike has more current assets then debt which is good as more working capital means less financial strain a company experiences. The Current Ratio of Nike’s has kept at 2.27 and 2.32 in 2002 and 2003 respectively. Both of these are acceptable as current ratio should be at least 1.5 which meaning Nike seem to do alright by covering its short term debt. Even though the net income dropped from 668.3 million to 474 million from 2002 to 2003, Nike still hold a much stronger position than any other competitor. The reason for their strong position is that Nike does not operate their own manufacturing plants by subcontracting the product instead. This eliminates costs such as plant expenses, workers’ wages and machinery expenses etc. Therefore those costs can be utilities in other area such as R&D and marketing which create revenue for Nike. (figures from Nike Inc Financial report 2003 and http://www.cwu.edu) Nike also done well in International market, as of 2004 first quarter, Nike showed sales growth of 17 percent in Asia-Pacific region, 14 percent in Europe, the Middle East and Africa, and 13 percent in the Americas excluding the U.S. (Francis, 2004) Ability to adopt current trend (R&D) In determining why Research & Development become an important internal strength of Nike, one must first go back to the Mission of Nike, “To Bring inspiration and innovation to every athlete in the World”. Nike react proactively to this fast changing market by their ability to adapt to current trend and with their innovative mindset which proven to be ahead of other competitor. Nike conducts continuous, basic research that benefit numerous aspects of the sports and fitness industry, their primary objective had always been to provide a competitive edge and to help athletes perform better. (http://www.nike.biz.com) Ever since 1970’s, Nike’s research and technology has began to revolutionize the athletic footwear industry and continued to do so in the 1980’s with the addition of the apparel industry and into the sports equipment industry in the 1990’s. Nike often takes an initiative approach to address industry endeavors which is the backbone of attaining superiority against their competitors. Strong emphasis of product technology has always lay in the heart of Nike’s research and development process. They have built their own Sport Research Laboratory (NSRL) in the Oregon Headquarter. The Lab has grown considerably in 30 years, it now commands nearly 13,000 square feet and equips with stat-of-the-art research equipments where employees generate innovative idea and turn it to a products. The NSRL has all the hi-tech equipments that the scientist would need in order to simulate conditions that athletes face. So that every product that Nike produce will be well suit all athletes needs. Some examples of the scientific techniques that employed by Nike are kinematics, kinetic, foot morphology, and electromyography, and of course some will remain confidential. (http://www.nikebiz.com) Moreover, Nike research and development is uncovering new way to enhance performance of their sport shoes, apparels and equipments. Every product is in a state of continual evolution. One famous illustration of Nike’s innovative idea is the Air technology which introduced in the 1979. It changed the athletic-footwear business forever and Nike is still selling billons of Air-equipped shoes each year. (Lieber, 2002) Nike’s innovation idea has expand to apparel which use high-performance fabrics, like FIT technologies that manage temperature and moisture to help athletes train and compete in any condition. (http//www.mandthelp.com) Weaknesses Top management turnover Nike has a lot of positive aspects that contribute their competitive advantage. There are goods and there are bound to be bad as well. One of the weaknesses is the high turnover of top management from time to time. The changing of top management will have serious effect in the company because new comer would need time to adapt to the environment befo...