Nike, Inc.

and the Athletic

Footwear Industry
Strategy and Competition
Analysis

Prof. Ben Gomez Casseres

By:
Polina Petkova, MBA 2011
Sudarsan Pattabiraman, MBA 2011

5/19/2010

1
Firm Overview

Nike, Inc. is the biggest manufacturer worldwide of both athletic footwear and apparel

in terms of sales. It specializes in the production and sale of athletic footwear, apparel and

equipment. For the fiscal year 2009 it announces revenues of about $19.2 billion.1 It is a

global company that besides in the US, which accounts for 34% of its revenue2, operates in

Europe, Middle East, and Africa. Nike has manufacturing plants and operations throughout

Asia. The global slowdown in both sales and consumption in the retail industry affected Nike

and it recorded a revenue growth of only about 3% in 2009. Net income fell by 21% and was
3
expected to continue to fall in 2010. However, net income in the third quarter of 2010 is

almost double in the net income in the same period of the previous year bringing it up to $496

million.4

Nike’s Global Business Strategy

When first founded in 1962 under the name of Blue Ribbon Sports, the strategy was

“to distribute low-cost, high-quality Japanese athletic shoes to American consumers in an

attempt to break Germany’s domination of the domestic industry.”5

Today Nike offers athletic shoes at every marketable price point to a global market.

Nike sustains its leading position through emphasizing quality products, constant innovation,

and aggressive marketing. Nike sells its products in more than 180 countries under not only

its namesake brand but brands such as Cole Haan, Converse, Hurley International, and Umbro

Inc.6 It uses distribution channels such as company-owned stores and websites or sports

retailers, such as Foot Locker.

1
Nike, Inc. 10-K, 2009, p. 26.
2
Ibid., p.86
3
NIKE, Inc. Reports Fiscal 2009 Fourth Quarter and Full Year Results
4
Wikiinvest.com, Nike, Inc.
5
„Strategic Analysis of Nike, Inc.,” DePaul University, March 14, 2000.
6
Wikiinvest.com, Nike, Inc.

2
 As mentioned earlier, Nike is a truly global company, which means that its success

story is transferrable over borders. It divides its sales into four main regions- the US, Europe,

Middle East and Africa (EMEA), Asia Pacific, and Central and South America. For 2009 each

of these regions accounted respectively for 34.1%, 28.7%, 17.3%, and 6.7% of total revenue.7

Segmentation Strategy:

Nike realizes that in order to be number one they need to offer a wide range of

products to be able to develop a culture and fulfill their loyal customers’ needs. Nike’s

strategy in terms of segmentation is excellent. Their core product is footwear but they also

manufacture apparel and equipment and thus, they spread their influence in other sport-related

markets. Nike also has several sub-brands to grasp different consumer groups.

Nike’s main source of revenue is athletic footwear, which is also its core

competency. It accounts for 54% of total revenues. It is designated for running, cross-training,

basketball, soccer and it includes even a casual footwear line. Sales in this segment increased

by 14% in 2009 from which a big portion was a result of the increase in sales in the Asia

Pacific region.8

The second most profitable segment for Nike is apparel, such as t-shirts, shorts,

sweatpants, and licensed apparel made specifically for universities with their own logos. With

an increase of only 0.2%, apparel sales accounted for 27% of the company’s revenue in 2009.9

However, sales in this segment grew by 14% in the previous period, between 2007 and 2008,

due to the growth of 25% of revenues in emerging markets, such as Russia, and other EMEA

countries but also a substantial revenue growth of 50% in China.10 Unlike footwear, which

main market is the US, the majority of apparel sales come from the EMEA region accounting

for 38% of total apparel revenue.

7
Ibid.
8
Nike, Inc. 10-K, 2009, p. 87
9
Ibid.
10
Wikiinvest.com, Nike, Inc.

3
 Equipment, such as balls, golf clubs etc. accounts for 6% of total revenues in 2009

and 13% come from other brands under Nike, such as Cole Haan, Converse, Umbro etc.

these different sub-brands supplement Nike product lines. For instance, Umbro specializes in

selling soccer apparel and footwear. Nike Golf targets golf players and offers specialized golf

equipment, apparel and footwear. Cole Haan on the other hand offers premium dress and

casual footwear. Hurley International offers products suitable for snowboarding, skating, and

surfing.

Marketing Strategy:

Significant role for the competition of market share in the footwear industry plays

marketing in order to strengthen the brand image, develop product identity and expand

customer loyalty. Competition between players is non-price but rather based on

differentiation in brand image and product innovations. Therefore, substantial investments in

marketing campaigns are required. Nike invests annually between 11% and 13% of revenue in

marketing. 11

 Advertising strategy: Nike’s strategy was to create dominant presence in media. Nike

created media presence in several trend setting United States cities. TV ads linking Nike to a

city were used, but real drivers were huge oversized billboards and murals on buildings that

blanketed cities with messages featuring key Nike-sponsored athletes, not products. The

company focuses its marketing on celebrity endorsement, i.e. athletes in basketball, golf,

soccer, and tennis. Lately, Nike has also began to sponsor big sporting events so as to create

huge awareness and brand following. In 2008, Nike spent significant amount on advertising in

the Beijing 2008 Olympics and the Football Championship. After the recent Tiger Woods

scandal Nike plans on revisiting it celebrity endorsement strategy. It can be noted that the

‘swoosh logo’ is one of the most famous in the world due to these huge advertising efforts.

11
Nike, Inc. 10-K 2009, p.24.

4
  Branding Strategy: Nike’s strategy in this front is to develop a premium brand

associated with high quality product that satisfies customer needs. Nike’s brand is associated

with an aggressive attitude portrayed by, “you don’t win silver, you lose gold,”12 which

clearly suggests that winning is vital. The Nike customer associated the Nike brand with being

the ‘American’ way: Being individual and aggressive like Michael Jordan and John McEnroe.

Nike built its brand around sports, attitude and lifestyle. Nike backed this strategy with

marketing campaigns like “Just do it” and with the companies front athletes like Michael

Jordan and Tiger Woods.

 Selling Strategy: Nike’s strategy in early 2000s was to develop, flag ship stores,

NikeTown shops in bigger cities, first national, and then abroad. Nike was the first company to

establish flagship stores and it turned out to be a sensation. 13 There are independent small

retail stores that sell Nike products all around the world as well. Also, on seeing the potential

of the low price market, Nike took efforts in 2005 to tap in to the low price segment by

striking a deal with big retail discount stores like Walmart and rolled out starter shoes at a

cheaper price, competing with private label brands. However, to avoid brand dilution, Nike

did not use the swoosh logo in these shoes. Currently, Nike has a high quality website and

uses it as an online selling channel. NikeId14, a part of the website allows a customer to

customize his own shoes and buy it. The website is available in 14 languages and is different

according to the country requirements.

Manufacturing Strategy:

12
“History of Nike,” Sneakerhead.com
13
Kapferer, “Brand Identity Prism”
14
Nike website – www.nike.com

5
 Nike manufactures all of its footwear from outside United States. Nike has contract

suppliers in China, Vietnam, Indonesia and Thailand15. These countries accounted for 36%,

36%, 22% and 6% of total NIKE brand footwear respectively. Nike also has manufacturing

agreements with independent factories in Argentina, Brazil, India, and Mexico to manufacture

footwear for sale primarily within these countries. Primary reason for this is that it is cheaper

to manufacture in South East Asia and transport it to USA and Europe, regardless of the

transportation and tariff costs involved.

Organizational Strategy:

With over 21,000 employees worldwide, the company was organized into departments

by both geographic divisions and product categories, which created overlapping management

responsibilities and a fluid leadership structure. For example, a footwear manager in Europe

answered to both the Vice President of Footwear and the Vice President of Europe. However,

there was no formal communication link between the regional vice presidents (those in the

United States, Europe, Asia-Pacific, and Latin America) and the product vice presidents

(footwear, apparel, equipment).16

Human Resources Management Strategy:

The sweat shop debacle in late 1990s has led Nike to form a distinctive strategy to

provide a good working environment for employees. They have several internal guidelines

and compliance standards apart from state laws for ensuring proper working conditions for all

workers in its contracted supplier factories.

Due to the magnitude of Nike and their number of stores and manufacturing plants

throughout the world, Nike has taken the time to recognize the importance of each individual

15
Nike, Inc. 10-K – 2009, p. 4
16
“Expanding the Playing Field: Nike’s World Shoe Project Case,” The William Davidson Institute, January
2002

6
and what they can contribute to the team. For this reason, Nike does not call its employees,

‘employees’ but rather ‘team members’ because each part of the team has something to add to

the business.

They have also admitted that they have a very large array of workers and this brings

many diverse cultures and points of views together. According to one of its statement,

diversity and inclusion is a crucial factor in Nike’s diplomacy in their many locations and

globally. In identifying the differences they have set apart the opportunities to better

understand how their teams will work together and what adversity they may face because of

this. In order to strive to reach this mission they have put into action these strategies:17

 Cultivate diversity and inclusion to develop world-class, high-performing teams

 Ignite change and inspire critical conversations around diversity, inclusion and

innovation

 Create venues and environments for open dialogue, diverse opinions and a multitude

of perspectives

All of the above will in future venture apply and assist them in working more efficiently and

having more satisfied employees for longer periods of time.

Strategy Analysis

To analyze and evaluate the above strategy, it is necessary to understand the internal

and external forces in the environment. To begin with, we did a basic SWOT analysis of Nike

and then performed an extensive Porter’s five forces analysis of the footwear industry in the

US and the emerging markets from Nike’s point of view.

SWOT Analysis:

Strength Weakness Opportunities Threats

17
Nike Website - http://www.nikebiz.com/company_overview/diversity/

7
  Brand Image  Under constant  Emerging  Mature industry,
 Market leader scanner of Human markets susceptible to
in most of the rights companies due  Can be a recessions
world to its history of leader in  Dependence on
 Diverse unethical labor developing contracted suppliers
product portfolio practices environmentally – compliance issues
 Strong  Premium player in sustainable  Ever Changing
advertising a price sensitive business customer preferences
 Experienced sector  Dependence on
Management team endorsed athletes
 Seasonal
business

Porter’s Five Forces – Footwear Industry in the US & Developed Countries:

Threat of New entrants

(Low)
~High Barriers to Entry
Capital Intensive
Strong Brand Following
Economies of scale
High R & D Costs
Industry in consolidation
phase

Buyer Power (High)

Supplier Power
(Low)
Raw Materials are
abundantly available
Cheap resources,
commodity items
Everything depends
Internal Rivalry (High) on Customer
Fierce Competition- Adidas, Preferences
Reebok, New Balance Price sensitivity
Mature Industry issues
Mostly Non-Price Brand following
competition Retail and vendor
Differentiation strategy consolidations
Industry in Consolidation Growing power of
phase retail chains e.g.
Walmart

Substitutes (Low)
Other types of shoes
Other sport apparel

Rivalry: (Very High)

8
  Since the athletic footwear industry in the US is a mature industry, competition is

targeted towards attaining market share. Companies need to introduce products at numerous

price levels in order to compete and reach all areas of the market.

 In this sense there are only a few players who are able to compete in all sectors: Nike,

Adidas-Reebok, and New Balance. Smaller firms in this industry focus on specific type of

shoes hence targeting specialized sub-markets, i.e. Asics on running shoes.

 Rivalry among the big players is fierce. Since they cannot compete on price they need

to differentiate their product through constant innovation. Also, continuous efforts are needed

towards strengthening their brands.

 In order to stay competitive and have presence in all sectors, many mergers and

acquisitions, i.e. Adidas and Reebok, are taking place and the market is going towards

consolidation. As a result, maintaining a single brand image for companies like Nike becomes

really a tough ask. We will discuss rivalry more in details in the Competitor Analysis later on.

Threats of New Entrants: (Low)

Barriers to entry in the athletic footwear industry are high due to several factors.

 It is as very capital intensive industry. Even though it would not be difficult for a new

company to obtain the raw materials and the labor needed to produce shoes, there is almost no

chance for them to gain popularity in such a mature industry with some of the strongest brand

names in the world. Brand loyalty is extremely strong and it would be very hard for a new

entrant to “steal” loyal customers from the already existent players.

 Economies of scale play a huge role as well and the bigger players have an advantage

of producing the products at a lower price than compared with newer entrants. As the output

is bigger and the fixed costs of factories, machinery, marketing and R&D will be decreased

per unit. Both marketing and R&D constitute high costs and since new entrants will not be

able to take advantage of the economies of scale they will be less competitive.

9
  Another barrier is the fact that access to endorsement, which we discussed, is very

important in the industry. The bigger players have already established agreements with both

teams and athletes. New entrants will not be able to pay hefty sums for such agreements.

Similar conditions apply for distribution opportunities and retailers. They want the well-

established brands on their shelves that customers want rather than a new unknown brand.

 The industry itself is in a consolidation phase and only the big ones will survive. The

large companies are strategically and constantly acquiring smaller companies. Some of the

most popular acquisitions include Reebok by Adidas, Converse by Nike, Saucony by Stride

Rite, etc. Small companies are bought before they become a threat to the bigger ones and

before they have a chance to gain market share. In other words, it is impossible to grow in this

industry because someone will take over your company.

Substitutes: (Low)

In theory there are a several substitutes of athletic shoes. However, the perceived threat is low

since they have unique functions.

 First, in the sports industry, other types of apparel could also be seen as a substitute, in

terms of building image and style.

 Second, in the same product category, other types of shoes are also substitutes, such as

slippers, heels, boots, flip-flops, etc.

 Even though sneakers are still the most popular type of footwear in the world,

there is substantial threat coming from the number of other types of shoes.

Lifestyle athletic shoes sales, for instance are growing at the fastest annual rate and

Puma is undoubtedly the leader in this segment- with more than 50% sales

growth.18

18
“Athletic Footwear; Industry Analysis,” Tufts University, Economics of Management and
Strategy, May, 2006.

10
  Companies such as Steve Madden and Sketchers are also seen as threats. Steve

Madden’s “thick high heeled shoes”19 are very popular and since thick heels are

considered a more comfortable version among women they could be a substitute

for sneakers. Sketchers introduced non-athletic heel-less shoes also called “sneaker

mules”20 These shoes, first gained popularity in Europe but now are also becoming

popular in the United States.

Supplier Power: (Low)

Typically athletic shoes are manufactured using three major raw materials- cotton,

rubber, and foam. The rubber is vulcanized through a simple chemical process that improves

durability and stability.21 However, all of these materials are commodity goods. In other

words, the suppliers do not have the power to bargain the price of their product, since there

are numerous suppliers. Hence the supplier power is low.

However, there has been some standardization of production in the industry due to

growing concerns of labor practices of the suppliers and manufacturers. These practices have

been damaging the image of some companies including Nike. Therefore, the big companies

prefer to work only with approved manufacturers and suppliers that are known to follow these

labor standards. Both Adidas and Nike have created a system to ensure that all the high
22
quality of the product, the working conditions, and the distribution are at high standards. If

the supplier fail to meet these standards contracts are discontinued. Therefore, suppliers are

trying to establish themselves as reliable because once they gain Nike as a customer they

know that they will request enormous volumes. However, to reach this level, the supplier

needs to make investments in their facilities to improve working conditions and many

suppliers cannot afford to do so.

19
Ibid.
20
Ibid.
21
Ibid.
22
Ibid.

11
 Buyer Power: (Very High)

The buyers for this industry are retailers and end users.

 The footwear retailers, i.e. Footlocker, Wal-Mart, range in sizes. However, the top 25

retailers account for two-thirds of the sales of athletic footwear- approximately $15 billion in

value.23 New retailers are entering the market, such as “big box stores” and vendors that open

their own stores. The lack of concentration among buyers brings down the margins and gives

the power to the vendors. Retailers also have no power in determining the design of the

product. Therefore the big footwear manufacturers generally dictate the price of their shoes.

 In order to gain more power buyer companies have started merging- Footlocker -Foot

Action, Sport Authority- Gart. This consolidation will transfer some of the power from the big

players because in order to be industry leaders they will need these well-recognized retailers

as well. Growing margins suggest that buyer power has been increasing.24

 The end user of the industry is also considered a buyer and he has unlimited power.

Every company is fighting for the loyalty of the end user through constant innovations and

brand management. However, if the user is dissatisfied, he can easily switch the brand to
Threat of New entrants
(High)
another one. Therefore, overall we consider buyer power to be high.
Less/Not explored Markets
i.e. everyone will be
interested
Non Sophisticated market
needs
Local players advantage –
Conservative government
policies to help local
players
Buyer Power (Very
Supplier Power High)
(Low) Rivalry (Very High) Customer needs to
Cheap labor, needing Fierce Competition from be educated
jobs in South East global brands E.g Adidas, High price sensitivity
Asia Puma,Markets
Porter’s five forces analysis: Emerging New Balance etc Brand image to be
Raw Materials are Local players with cultural re-established
abundantly available advantage and price Need to educate and
Cheap resources, competition catch retailers,
commodity items distributors etc
23
Ibid.
24
Ibid.

Substitutes (Low)
Bare foot, walking with
12
slippers e.g. India
Leather boots and slippers
As we see in the five forces analysis picture above, most of the attributes pertaining to

Supplier power and Substitutes remain the same. However, there are considerable changes in

the nature of the market, the buyers and hence we see some changes in rivalry, new entrants

and buyer power.

Threat of New entrants: (High)

 Since the markets are quite new and unexplored, every big player in the world is

looking to enter into these markets.

 The market is less sophisticated and customers will get satisfied with basic level

products. Hence, less capital is needed to produce basic level goods.

 Since there is no major brand following, it is not capital intensive for a new entrant to

enter into a regional market.

13
  Even though the global players can have low production cost, the marketing and other

expenses grow high and they are competing with smaller players here unlike in developed

countries. As a result, overall threat of a new entrant is considered high here.

Buyer Power: (Very High)

The buyer power remains high in both developed and emerging markets. However, the

reasons for that differ as follows:

 The customer is not aware of the product or brand. Hence, he needs to be educated

about the features and the comfort the footwear provides.

 Emerging markets in general are very price sensitive. The premium sector will grow

with time as the market becomes more sophisticated.

 The retailers and distributors need education to do the business and operations and

hence, it is a daunting task for making them move from their regular local vendors to a new

vendor.

Threat of Rivalry: (High)

The overall threat of rivalry is high here as well, arising from two dimensions:

 Global competitors like Adidas, Reebok, Puma etc

 Local competitors who are already in the business and have a cultural advantage in

understanding the customer.

In general, with three out of five forces being high, emerging market does not look like a

favorable environment. However, on continuous marketing and educating efforts, this market

might be transferred into a growth region for all companies.

Competitor Analysis

To understand the position of Nike in the industry, it is important to perform a

competitor analysis. Nike’s major competitors in the footwear industry are Adidas & Reebok,

New Balance, Puma, Sketchers and other players combined together.

14
Market Share:

As of 2007, Nike has a dominant global market share of 31% followed by Adidas and

Reebok together at 22%. The corresponding figure in US hovers around 36% followed by Adidas

and New balance at distant second and third. 25

Source: Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February

2008.

Financial analysis:26

Earnings Current
Company Mkt Cap
per share ratio
From theNike
analysis shown above between3.51 35.42B
the major competitors, it is quite obvious that 2.97

Puma
Nike is leading the market in most of aspects.13.63
However, the company 3.66B
to note here is Under 2.19

Adidas
Armour as this company has high growth rate 1.95 8.80B
despite the fact that other companies are 1.58

Under Armour 0.98 1.63B

experiencing a slow sales growth. Nike should put some effort to study the strategy of this
3.73
company.
New Balance Privat

25
Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008.
26
Yahoo! Finance, Google Finance, SEC Filings of the companies

15
Product Portfolio Analysis: 27

Stride Rite Corp

New Balance

Converse

Saucony
K-Swiss

Mizuno
Reebok

Brooks
Adidas
Type of

AND1
Puma

Spira
Asics
Vans
Nike
Shoe\Company

Running X X X X X X X X X X
Walking X X X X X X
Basketball X X X X X X
Children’s X X X X X
Tennis X X X X X
Lifestyle X X X X X X X
Skating X X X
Cross-Training X X X X
Soccer X X X X

27
Company websites.
“Athletic Footwear; Industry Analysis,” Tufts University, Economics of Management and
Strategy, May, 2006.

16
 It can be seen that Nike has products in all lines. During early 2006, Nike was lacking

products in the skating category. However, they quickly recognized this shortcoming and

introduced a skate boarding shoe. Also, it can be noted that there are overlapping product

category lines between Adidas and Reebok. Hence, there is a high possibility that Adidas is

competing with Reebok and hence cannibalizing its own sales after the merger. With such a

product line, Nike will be able to compete with all players in the industry. Therefore, Nike is

at a strategic advantage.

Advertising strategy:

The advertising strategy differs from company to company. Generally, Nike believes

in spending 5-7% of its revenues in advertising and endorsement. Nike has planned to spend

$4.2 Billion until 2014 for endorsements alone. With the huge size of Nike, it is tough for

other companies to allocate a big amount for their marketing expenses. Moreover, Nike has

always an edge when it comes to advertising and marketing. The table below shows the

advertising strategy for the major players in the industry.

Company Strategy
 Endorsing Athletes
 Sponsoring Sports events
Nike  City based advertisements
 Banners & Billboards
 Themes on bringing inspiration and innovation to every athlete in world
 Sponsoring Sports events
Adidas, Reebok  Endorsing Athletes
 Themes on improving performance of every athlete in the world
 Mixing influence of sports, lifestyle & fashion
 Puma concept retail stores
Puma28  Puma fashion shows
 New stuff advertising campaigns
 Building seasonal momentum during holiday seasons
Other companies  Minimal or less advertising based on stores
Branding Strategy:

Nike has invested a lot so far in developing a premium brand that implies high quality

and care for the customer. Nike has a wide range of products ranging from athletics to life
28
“Puma – Brand Communication analysis,” Trent Kahute, 2006

17
style and also in different price ranges. Therefore, it is always a challenge to fight against

brand dilution within Nike. The following gives an idea of the customer’s perception of the

brands.

Company Branding message and strategy

Athletic, Influential, Outgoing, Aggressive, hi tech, futuristic, retro cool
American way of living
Nike
Associated with Athletes at top of their sport
To bring inspiration and innovation to every athlete in world
Clear, orderly, Practical, hi tech, Sophisticated, Sincere
Adidas, Reebok Conservative European style
To improve performance of every athlete in the world
Associated with elite soccer players/teams, NBA stars, Hip hop artists
Elegant, colorful, fresh, spontaneous, individual, metropolitan,
international
Puma
Mixing influence of sports, lifestyle & fashion
Fashion brand, performance & casual footwear, fringe, extreme sports
Other companies Based on their product lines. Generally not a strong brand message
In general, Nike’s shoes are associated to be of high quality and stylish. Reebok’s are

comfortable and casual, and the Adidas brand boasts superior performance and is “perceived

as a professional, technically orientated brand with strong European roots”29.

Technology and Innovation strategy:

Nike fields some of the best in class technological practices and has a few patents to

its credit. Nike emphasizes on these and has developed a lot of new products with use of high

technology and sophistication. An example of that is the microprocessor shoe to give great

experience and comfort to the customer. However, Adidas is also working on high tech

innovations to provide high quality shoes. Lately, Adidas and Nike have been doing

entertainment based marketing campaign by forming alliances with technology/entertainment

companies. Nike had an alliance with Apple to sell Nike shoes with Apple iPods while Adidas

tied up with Microsoft to sell Adidas goods with Microsoft Xbox gaming systems. So far the

success of these alliances is yet to be quantified.

Manufacturing strategy:

29
Kang, Stephanie. “Sports Shoe Rivals Step Up”. The Wall Street Journal, 6 Jan 2006.

18
 Nike follows a 100% outsourcing strategy. Most competitors follow the outsourcing

strategy. Exceptions to this are New Balance and other smaller players. New Balance claims

that 75% of its production is from the US and other small companies produce in the US as

well.

Competitor Analysis in Emerging Markets:

In general, competition in the emerging markets is granular and from a lot of players.

However, the case in China is very different. According to a research report by BofA Merrill

Lynch, Nike was the most popular sport brand in China with 19% market share in 2008, while

Adidas ranked second with 15% share and Li Ning third with 11%. The brokerage estimated

Li Ning to have overtaken Adidas in 2009 as the second-largest player in China's $10 billion

sportswear industry. There are speculations that Li Ning has overtaken Nike as well. 30

Issues of concern

It is not easy to stay as the market leader always because everybody wants to be in

your place. Nike’s overall US revenue growth is declining as discussed earlier. Overall

growth in other geographical regions has also dropped considerably. With the merger between

Adidas and Reebok taking off slowly and strongly and surging of companies like New

Balance, Nike’s sustainability of its market leadership becomes challenging. There are a few

challenging issues that Nike is facing at this point of time.

1. Maturing industry in USA

a. Tightening competition – growth of Adidas, New Balance, Puma etc. as shown

in the previous competitor analysis sections. Product differentiation alone will

not help as customers will not be able to understand the advantages of

technology beyond a certain level. There should be a price advantage as well.

b. Problem of brand dilution – Nike has been developing a premium and high

quality brand image so far. With Nike entering low-price segments, there is a
30
“Chinese Sports Brand Takes on Nike,” Vivian Wai-yin Kwok, Forbes.com

19
 possible chance of brand dilution and as a result customer loyalty might take a

hit.

c. Sky rocketing marketing expenditures and risk of endorsements – Marketing

expenditures are growing steadily. A new risk on athlete endorsements is seen

after the Tiger Woods scandal. Therefore, Nike has to decide on spending the

endorsement and marketing budgets wisely.

d. Premium brand’s susceptibility to economic recessions – Premium brands are

always susceptible to recession. It is to be noted that Nike has not gone back to

its original growth rate ever since the 2008 economic recession occurred.

2. Increasing competition in developing economies

Amidst heavy competition to be a market leader in developing economies, there are quite a

few issues to be noted.

a. Losing market share in China – Li Ning, as we explained in the previous

section is in catching distance. It is worth noting that Nike does not have a Chinese

online website store to facilitate customers to come online and learn/buy Nike’s

products31.

b. Price sensitivity – Developing markets are generally price sensitive markets.

Nike’s premium and high quality brand image doesn’t sync with the expectations

of the customer. In other words, the differentiation strategy might not bring as

good results as it had brought in the USA.

3. Significant reliance on IT and sophistication in managing supply chains32

Nike is heavily dependent on information technology systems across our supply

chain, including product design, production, forecasting, ordering, manufacturing,

transportation, sales, and distribution. Nike’s ability to effectively manage and maintain our
31
“Li Ning Hoping To Grow Market Share Through Online Sale,” Sports Business Daily, December 2009.

32
Nike, Inc. 10-K 2009, p. 18

20
inventory and to ship products to customers on a timely basis depends significantly on the

reliability of these supply chain systems.

4. Environmental sustainability

a. No direct control on compliance issues – Nike relies solely on its

subcontractors for manufacturing of its footwear. Having already faced several

issues on unfair labor practices at these subcontractor factories, Nike always

carries a risk of not having control over compliance to labor code laws. This is

considered by us as a big risk as another scandal of unfair labor practices will

completely collapse Nike’s position in the industry.

b. Solid waste from shoes – There will always be a lot of solid waste from Nike’s

footwear manufacturing processes. Also, being a market leader, it is the

responsibility of Nike to develop environmentally sustainable business and stand

as an example for others to follow. A possible option will be recycling, but Nike

still has no concrete strategy in this place.

Recommendations

 Focus on Technology and Innovation

o With the market being mature in US and developed countries, product

differentiation is the best tool to gain market share. Nike should continuously

invest in product design and innovation to be always with a leading edge over

the trailing competitors.

o Focus on setting up a reliable Information system that is capable of handling

complex supply chains in a fool proof manner.

o Property, Plant & Equipment costs for 2009 stood at $1.957 B as opposed to

$1.890 B in 2008 which is a 3.5% increase. However, this needs to increase by

5 – 7% every year. Overall, 15 – 20% of revenues need to be spent on this

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 because the product design and innovation forms the backbone of the

company.

 Revisit branding strategy by decoupling cheap and low cost footwear from

flagship items

o Cheap and low cost footwear should be decoupled from the existing Nike

brand. They might be sold under a different name, but not Nike. This might

help savor the premium brand image of Nike and help convey one message to

our brand. For example, Nike starter shoes should be sold as just starter and

not Nike starter.

 Follow both Differentiation and Pricing based strategy

o With the market matured in the US and developed countries, the competition

comes down to getting more market share than any other competitor in the

business. Thus, an aggressive strategy that combines both differentiation and

pricing based strategies together will definitely serve better than just

differentiation. We saw that the operating margins for Nike are around 44%.

This means that Nike has the scope to do a combined differentiation and

pricing strategy

o In a developing market, the market grows with a price competition and later

transforms into a high quality based market with non-price competition. Since

the industry in the developing economies is growing, it is necessary to have an

aggressive pricing based strategy as well. As Nike has been building a high

quality brand image so far, it makes good sense to follow both differentiation

and pricing based strategy together.

 Compete in full fledge in Emerging markets, particularly in china make a website

store

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 o Nike is currently the market leader in China. But competition is catching up

and Li Ning has been growing strongly. In this situation, Nike has to operate in

full fledge to capture market share in emerging markets. Basic things like an

online store in a country like china will seriously help drive a lot of business.

 Invest on sustainability research

o It is high time Nike begins to invest more on its sustainability research.

Companies like CorpWatch are consistently watching Nike and this issue of

environmental pollution will eventually come up.

o Also, if a proper recycling chain is established between the end user and the

company, the overall fixed costs will go down and hence profits might go up,

along with environmental sustainability.

o Nike should also work with its collaborators in all forms to have efficient

sustainable supply chains. This overall might reduce the costs for Nike and

benefit the whole society as well.

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References:

1. Nike, Inc. 10-K, 2009.

2. NIKE, Inc. Reports Fiscal 2009 Fourth Quarter and Full Year Results

3. Wikiinvest.com, Nike, Inc.

4. “Strategic Analysis of Nike, Inc.,” DePaul University, March 14, 2000.

5. Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008.

6. “Athletic Footwear; Industry Analysis,” Tufts University, Economics of Management

and Strategy, May, 2006.

7. “History of Nike,” Sneakerhead.com

8. Nike Official Website – www.nike.com

9. Kapferer, “Brand Identity Prism”

10. “Expanding the Playing Field: Nike’s World Shoe Project Case,” The William
Davidson Institute, January 2002.

11. Yahoo! Finance

12. Google Finance

13. “Puma – Brand Communication Analysis,” Trent Kahute, Fall 2006.

14. “Sports Shoe Rivals Step Up,” Stephanie Kang, The Wall Street Journal, 6 Jan 2006.

15. “Chinese Sports Brand Takes on Nike,” Vivian Wai-yin Kwok, Forbes.com

16. “Li Ning Hoping To Grow Market Share Through Online Sale,” Sports Business
Daily, December 2009.

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