Strategic Analysis of Nike
Any organization that desires to realize its goals or become successful in the market place should come up with an effective strategy. Nike Inc. is an exemplary illustration of a firm that has an effective strategy. The Nike brand is renowned all over the world and the company continues dominate the sportswear and apparel industry despite fierce competition from other firms. Nike employs a multifaceted strategy that takes into account every aspect of its business. On that account, the purpose of this paper is to conduct a comprehensive analysis of Nike’s strategy and to make recommendations as to how the firm can improve its strategy to remain competitive in the sportswear and apparel industry. To foster an understanding the economic implications in the company, the paper uses the price elasticity of demand as the micro economic tool for analyzing the company.
History and Overview
Nike, Inc. is a transnational company that is involved in the design, development, production, and international sales of apparel, footwear, accessories, and services. Nike’s main base of operation is located close to Portland and it is the biggest distributor of sportswear across the globe. Further it is a key producer of sports equipment and has a revenue base of more than $24 billion dollars as of 2012 (Brettman, 2013). The name Nike is derived from the Greek goddess of victory.
The original name of Nike was Blue Ribbon Sports (BRS), and it was founded by Phil Knight, along with Bill Bowerman. Knight was an athlete at the University of Oregon while Bowerman was his coach; they founded the company at the start of 1964 (Sage, 2008). At first, the company functioned as a distributor of Onitsuka Tiger (currently ASICS), a Japanese shoemaker, and made most of its revenue selling merchandise out of Knight’s vehicle. BRS terminated its contract with Onitsuka Tiger in 1971 and it set itself to launch its line of footwear that would be marked by the swoosh symbol developed by Carolyn Davidson (Brettman, 2013). The mark was originally used by the company in the early 1970s and it is a registered trademark since the mid-1970s.
By the start of the 1980s, Nike had acquired half of the market share of the American shoe market, and the firm went public in the end of that year (Brettman, 2013). Nike grew its product line across the 1980s to include numerous sports and countries across the globe. The firm shifted to its present main premises at the start of the 1990s, at which time it also opened Nike town, its first brick and mortar store in the city if Portland (Peters, 2009). Peter Knight, the company’s founder and chairman, stepped down from his role in June 30, 2016 after seeing off decades of success that made Nike the most dominant player in its industry.
Nike markets most of its product under its own brand and has a broad product line. The company’s range of products range from sneakers, athletic wear, sport equipment, golf wear, skate boards, and has collaborated with numerous athletes to create product lines based on their names (Peters, 2009). In addition, the firm has subsidiaries, which includes Converse, Hurley International, and Brand Jordan, and it previously owned Umbro and Cole Haan, which it sold off. On top of producing sports equipment and wear, Nike runs brick and mortar stores under the Nike town brand. Nike is the main sponsor of many highly recognizable sport franchises and athletes, and also national teams through its sportswear and kits (Peters, 2009). Based on these descriptions, it is easy to see why Nike is one of the most recognizable brands in the world.
Supply and Demand Conditions
Nike Inc. is a United States-based multinational corporation that designs, develops and markets footwear and sports apparel and related accessories. According to Soni (2014), the company has succeeded in doubling its revenues by incorporating superiority and style in its products. Nike’s quality productions have been driven by increased consumer demands, reduced fuel prices, and labor market enhancements. The company’s management acknowledges growing demand and attraction for its brands in almost all global markets, with relatively low demand recorded in Western Europe and Japan. Economists have highlighted encouraging retail trends that indicate increasing demand in the United States and China (Baue et al., 2007).
According to Nike’s annual report, the company has recorded stable sales for some time (Nike, 2016). Mary Parker, Nike’s CEO explained, “Near term, there are some continuing macroeconomic challenges. As supply and demand find a new normal in the recovering economy, our industry is going to practice margin tension considering rising input costs” (Nike, 2016). The figure below gives revenue of different financial elements in Nike based on the 10 K reports for the year ending May 31st 2017 (United States Securities and Exchange Commission, 2017).
Figure 1: Financial Impact on Nike’s Supply and Demand Trends
|Year||Revenue||Net Income||Sports and footwear attire||Miscellaneous requirements|
|USD||%age change||USD||%age change||USD||%age change||USD||%age change|
A close look at figure 1 tells us that Nike’s footwear and sports attires are the products that enjoy the highest demand and sales. It also reveals a continuously increasing trend in the prices Nike has commanded from 2013 through 2017, which has been attributed to higher prices of equipment, sports attire, and footwear. Increasing global demand for the products has ensured higher total sales as well. The lowest sales were recorded in 2015, where the company incurred a loss of 1.2% and a 0% increase in revenue. This can be attributed to the constant sale of sports and footwear attire, confirming the argument that the sports and footwear range is the most profitable for the company.
Price Elasticity of Demand for Nike’s Products
Price elasticity defines the correlation between the demanded quantities of footwear and sports attires and price increases. In determining price elasticity, an elasticity coefficient that is less than 1, equal to 1, or more than one means that a product is inelastic, unitary elastic, and elastic respectively (Baue et al., 2007). Overall, Nike’s products are inelastic, that is, due to the superior brand image of the company, demands for its products are not significantly influenced by changes in prices. The inelasticity can also be attributed to the relatively high income levels of its target consumers, who consider the product prices an insignificant factor while building their consumption basket. Nike’s products have several substitutes, such as Adidas and Reebok, among others, which should influence its products’ price elasticity.
Different market segments also face challenges specific to them in relation to competition. The athletic footwear and the equipment industry for instance, is highly competitive across the world. Nike competes internationally with other companies dealing in athletic footwear, leisure apparels and various equipments. The main competitors in this market segment include companies with large and diversified lines such as ASICS, Lululemon Athletica, Adidas, Puma and Li Ning among others. In spite of the competition, Nike still remains the largest athletic footwear seller in the world, indicating relative price inelasticity of demand. According to the United States Securities and Exchange Commission (2017) the factors that have contributed to this inelasticity include product attributes such as performance and reliability, quality, innovation and development of new products and the consumer value; consumer connection to the brand and affinity for the products associated with the brand through marketing and communication, social media interactions, identification with prominent athletes, teams and coaches and endorsement by college sports leagues; and effective product sourcing and distribution strategies with attractive merchandise and presentation.
Currently, several factors influence the consumers’ responsiveness to set product prices, including consumers’ perceptions of luxury or necessary products. Consumers who participate in professional sports may perceive the company’s sports apparel and footwear as necessities and are more likely to purchase or use them due to quality reasons or brand endorsements. Consumers who purchase for luxury uses may be a little more responsive (Baue et al., 2007). Individuals with higher income levels are likely to purchase the products despite increasing prices and vice versa. Lastly, the availability of quality and affordable alternatives from companies such as Adidas may impact consumer responsiveness. It is important to forecast likely market reactions as a result of price adjustments to determine the value of a product to the company (Baue et al., 2007). Since the company’s profitability depends on sales, marketing managers must employ the elasticity concept to average the revenues and production expenses.
Costs of Production
- Nike faces fixed and variable costs. The former are business expenses that neither increase nor decrease regardless of the volume of production output. Operating expenses are typical fixed cost, which includes Sales General and Administrative. On the other hand, variable costs are the overheads that vary as the volume of output and sales change. They include direct labor and materials costs. According to the income statements of the last five years (2014-2018), Nike has faced an increasing trend in its fixed costs, such as SG&A (including demand creation expenses), interest, and income tax expenses.
Figure 1: Selling and administrative expense
Figure 2: Interest expense
Figure 3: Income tax expense
Figure 4: Selling and administrative expenses 2014
Figure 5: Selling and administrative expenses 2018
Since 2014, depreciation expense has increased by 30% from $518 million to $747 million; interest expense dramatically tripled from $38 million to $124 million; SG&A expenses increased by 23.9% from $8766 million to $11,511 million; and the income tax expense increased by 64% from $851 million to $2,392 million. Although demand creation costs included in SG&A expenses have increased by 18%, its proportion in the same has decreased by 3.5% from 34.6% to 31.1%. This decrease in demand creation expenses was offset by the increase in the proportion of operating overhead expenses.
Figure 6: Cost of sales from 2013 to 2017
Regarding the variable costs, cost of goods sold (including D&A) increased by
33% from $15,353 million to $20,441 million. Dramatic increases in both fixed and variable costs badly influenced the net income of Nike, especially in 2018.
Figure 7: Net income from 2013 to 2017
Net income decreased by 54.4% from $4,240 million to $1,933 million. The reduction in the net income in 2018 could be explained by the significant increase in income tax expense by 2.7 times compared to 2017.
b. Regarding decisions of output production, variable costs are relevant while fixed costs are not. This is because, even if the company produces nothing, it still pays the fixed costs to continue its operation. Therefore, variables costs such as labor, research and development, and raw materials will decrease the volume of output if they increase.
- In the sports footwear market, Adidas is the top direct rival of Nike. Besides, a number of other outstanding brands exist that compete with Nike in minor products such as apparels, deodorants, and sports accessories, they are Puma Fila, New Balance, Converse, Under Armour, K-swiss, Asics, Li-ning, Jordan, Vans, Sketchers, and Brooks (Bhasin, 2018). CFO of Adidas stated that the company is targeting 15-20% market share in every demography. The corporation has been boosting its market share in North America and China against Nike (“Adidas targets”, 2018).
Figure 8: Online market share by spending
Figure 9: U.S. footwear market share
Figure 10. Revenue from footwear segment of Nike, Adidas, and Puma (2010 – 2017)
Figure 11: Comparison of brand value between Nike and other brands regarding apparel
In North America, the market share of Adidas is still much smaller than that of Nike. For example, 2017 sales revenue of Nike was $15.2 billion while that of Adidas’s was $5.1 billion. However, the trend is that the latter is increasing its sales growth beating the former and Under Armour. The shift in consumer tastes from sportswear to casual street wear (Stan Smith sneakers of Adidas) has helped to produce a remarkable trend for Adidas and increase its region sales (Petroff, 2018).
b. Nike possesses a strong set of competitive advantages. First, the quality of its products is approved by billion of consumers in years. Second, it has resources in terms of money and labor to continuously create innovative designs. Moreover, the firm has a large global retail network to sell its products. It has also recently focused on direct-consumer sales through e-commerce. It launched the International Shipping policy that allows buyers to purchase shoes online (Nike.com) with free shipping service and reasonable return/refund policy. This move cuts off expenses of middle sales and fixed costs of physical stores while increasing the ability to up-sell products. More importantly, manufacturing efficiencies through automated technology and infrastructure advancements help the corporation to reduce labor and materials costs. Competitive advantages of the organization are the barriers to entry in this market. However, in the future, unless it continues to innovate and offer consumers quality products at reasonable prices, it will lose its market share to other competitors.
c. The athletic footwear market structure in which Nike operates is oligopoly with a size of $64.30 billion in 2017. In this type of market, key players such as Nike and Adidas have the ability to influence it in terms of prices and designs.
a. From the data above, the net income of Nike dramatically decreased because of a significant increase in income tax expense (both current and deferred). Due to the enactment of the Tax Act, the effective tax rate increased from 13.2% (2017) to 55.3%. To reduce taxes, the company should boost sales in countries with lower levies. Moreover, the firm can increase its profit and maintain leadership in the future by continuing to employ new technologies, diversify the portfolio of products that exclusively serve specific markets, co-brand with top athletes, utilize digital marketing and e-commerce, maximize marketing expenditure with sports endorsement, and continue to outsource manufacturing.
b. With the current position of Nike in the global market, the company has definite advantages to stay ahead of competitors by investing in research and development, and technology and marketing.
c. Athleisure, healthy lifestyle and wellness are trends that have recently boosted footwear sales growth. To meet the demand, Nike should penetrate the apparel and footwear categories, which suit specific sports. For example, active lifestyle encourages people to run and walk more often, the company should produce more running shoes with different designs and specific functions to serve different ages, ranges, and genders. Footwear products have high price elasticity. Therefore, despite the increase in demand due to the trend in lifestyle, Nike should not increase their price if not necessary. This is because, if it does so, it will soon encounter strong competition from local brands.
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