EXECUTIVE SUMMARY This study was conducted to analyze the strategies selected and employed by Nike Incduring 1990 to 2000 to deal with the rising criticism from the media and public. This studyemployed Porter’s strategic forces analysis to analyze the strategies deployed by Nike in between1990-2000. The study also used Porter’s five forces analysis to understand the opportunities andthreats faced by Nike Company during that period of time. The study also explored which of the Whittington’s systemic and Processual schools ofthought was relevant to Nike‘s strategy during 1990 to 2000 with respect to its growing criticism.Further, this study also identified which of Mintzberg’s cultural and environmental schools ofthoughts applied to Nike between the years 1996 and 2000 in terms of its strategy development. The findings revealed that Nike’s decision to move to Asia had strategic implicationsinvolved in it. The company tried to position itself as a manufacturer of differentiated productsand to gain cost leadership from its competition. The five forces analysis suggested that thecompany had an edge over its competition and the suppliers had very low bargain power due toNike’s vast number of subcontractors. The global share of the company was more than 45% andit enjoyed a unique position with its innovative and carefully designed products. The findings also suggested that the Nike Company employed Mintzberg’senvironmental strategies to find a way to deal with the criticism aimed at the company. Thefindings also suggested that the Whittington’s Systematic school of thought was applicable to thestrategic moves employed by Nike Inc.
2TABLE OF CONTENTSTitle Page#Terms of Reference ……………………………………………………………..…………….5Introduction: Nike Inc …………………………………………………………..…………….6Porter’s Strategic Model: Nike in Asia ……………………………………………………… 7Porter’s Five Forces Framework ……………………………………………………………...9Going Global Benefits Nike ………………………………………………………………….11Whittington’s Systematic and Processual schools of thoughts ………………………………13Processual School of Thought ………………………………………………………………..14Systematic School of Thought ………………………………………………………………..15Nike’s Approach in 1990-2000 ……………………………………………………………….16Mintzberg’s cultural and environmental schools of thought: a comparison ………………….18Environmental School ………………………………………………………………………...20Nike’s strategy in 1996-2000 ……………………………………………………………….…21Findings …………………………………………………………………………………….….23References…………………………………………………………………………………….. 25Appendices …………………………………………………………………………………….26
3LIST OF APPENDICES TITLE PAGE#APPENDIX A NIKE CASE STUDY: NIKE’S dispute with the University of Oregon in De Wit & Meyer 2004: 933-940 26
4LIST OF FIGURESFIGURE NAME PAGE#Figure 1 Business information in focus in environmental school 20
5TERMS OF REFERENCEDerek Hardwood, Module leader at Sunderland Business School, University of Sunderland, hasrequested this report on the Nike’s dispute with the University of Oregon in De Wit & Meyer, toanalyze the strategic moves employed by Nike Inc to deal with the growing criticism and publicmovements against the company. The report was to be submitted to him on Monday July 11,2011BASIC INFORMATIONI have employed various measures to understand and analyzed the strategic moves employed byNike Inc during the period of 1990 to 2000. Porter’s generic strategies model was analyzed andemployed on Nike Inc to understand which strategy was adopted by Nike Inc when outsourcingits work to Asian sub-contractors. Porter’s Five Forces model was also employed on Nike Inc forthe period of 1990-2000 to find out the opportunities and threats faced by the company duringthat period.Likewise, Whittington and Mintzberg’s strategic schools of thoughts were compared and studieswith reference to Nike Inc’s strategies during that particular period of time.
6INTRODUCTIONNIKE INC Nike is the world leader in the manufacturing of sportswear and gear with more than 47%market share across the globe. The company is among one of those companies who are onlyFortune 500 Company located in Oregon. The company has more than 700 shops around theworld and has offices located in 45 countries outside the United States (NikeBiz). It has most ofits factories in South East Asia including Indonesia, China, Taiwan, India, Thailand, Vietnam,Pakistan, Philippines and Malaysia (NikeBiz). In the year 2000, Nike had contracts in 46 countries with 565 subcontractors. Thecompany was enjoying 45% global market share. It had various outsourcing units in Taiwan,Indonesia and South Korea. The subcontractors were not offering their workers wage rates as per internationalstandards. The factories were divided into four main divisions; production, chemical, stitchingand Assembly section. The production goal was so extended that the workers had to work overtime, without incentives, to meet the goals. The workers were often abused physically andverbally by their supervisors. Many people were likely to be the patients of liver cancer, kidneydisease, heart attacks, infertility and many skin related disease in future due to poor workingenvironment. (Nike Case: Appendix A). In early 1990’s, many campaigns started against the company and its factories across theglobe. In October 1996, a 48 hour report was aired about Nike’s sub contractors and their factoryoperations in Asia revealing its business practices and downgrading behavior of subcontractorsto their workers (Nike Case: Appendix A).
7 Nike underwent various environmental and human right concerned activities to wash outthe affects of negative publicity and was very successful in its pursuance against the media andrivals.PORTER’S STRATEGIC MODEL: NIKE IN ASIA Like many other organizations, Nike Inc moved its operations to South East Asia mainlyin Taiwan and South Korea. This move strategic move, as per Porter’s strategic models, wasbased on the combination of cost leadership and differentiation strategy.COST LEADERSHIP Porter (1980, 1985) suggests that a company can become the leader of an organizationthrough managing its operational and other functional costs. The companies that follow thisstrategy are called lowest-cost producers in the industry. According to this strategic model, if acompany adopts cost leadership strategy, it can maximize its profits at a standard market price.The companies master cost effectiveness in all the activities of a value chain. The cost leadershipdoes not imply that the company will be selling its products at low price. Lynch (2003) reportedthat there are many companies in the industry who are charging higher or equal to theircompetitors while maintaining low cost efficiency and reinvesting the extra earning further intothe business.DIFFERENTIATION STRATEGY The differentiation strategy refers to the firm’s attempt to position itself unique in itsrelative industry with some value ad-ons to the buyers. This strategy involves the combination of
8one or more attributes offered in the products that are valued by the buyers in the industry anduniquely positioning itself to meet the needs and wants of the customers. Porter (1980) argued that the firms, who engage in differentiation strategy may incuradditional costs like advertising cost, cost of posititioning itself as a differentiated product orservice based company. Nike carefully planned its strategies to position itself in the industry. The Nike’s move tohire Asian sub-contractor was of high importance to the company to maintain cost effectivenessin the operations and functions. The company’s attempt to sub contract Asian contractors wasbased on the strategy to master cost leadership. Nike had lot of benefits involved behind thisstrategy among them the chief ones were lowest possible labor cost, direct access to the rawmaterial suppliers and low tariff rates. While Nike’s attempt to employ differentiation strategy to outsource its most ofmanufacturing in Asia and its aggressive marketing activities allowed it to topple its competitorsin the industry. The differentiation strategy used by Nike had three fold benefits to the company.The benefits came from extensive research and development by the research labs in the companyto maintain innovation. The company became able to deliver high quality products at low cost.Lastly, the effective marketing strategies and celebrity endorsements increased the awareness ofits products.
9PORTER’S FIVE FORCES FRAMEWORK In order to understand the threats and opportunities Nike had during the time period of1990 to 2000, we have used Porter’s five forces framework to analyze Nike’s position in themarket.SUPPLIERS POWER Distribution and sub-contractors mastery Access to cheap labor and raw materials Tariff and duties of a country Nike had 565 contract factories in 46 countries. The bargaining power of suppliers was relatively very low. The number of employees fluctuated in the factories due to their strict working hours and failure to meet the production target. The rapid change in the production process in the factories was to cause serious issues to the production of products to the company. The increased allegations on the company may end up suppliers increasing the wage rates of their workers which can ultimately increase the cost of production.BUYERS POWER The company was offering differentiated products to its customers Products were carefully designed to meet the needs of athletes and fashion trends. Competitive products all compete on differentiation The Nike’s image was badly affected by all the negative publicity
10 Many customers sent their used Nike shoes to the CEO of the company to show their discontent towards Nike’s activities in Asia. The biggest threat company had been that its products were charged at very high price which could have triggered the buyers’ need to switch to the low price brands. The buyers stopped buying its products with the perception that these are not sweatshop free. Many current and potential buyers, students of various institutions, started their consortium called Workers Rights Consortium to support the workers rights in the Asian factories, thus further affecting Nike’s image.THREAT OF SUBSTITUTES The company was engaged in effective marketing campaigns to diffuse the negative impact of media exposure. But the hate among people may have triggered the sale of substitutes in the market.THREAT OF NEW ENTRANTS The threat of new entrants was practically non existent at that time. Nike was a market leader with 45% global market share. The company had strong and well established brand name therefore it had no threat present at that time. Another reason for no new entrants was that the cost of production was already very high for the then present market players. So for successful penetration in the industry high capital was required. The new entrants don’t usually have high capital in the beginning which results in their market failure.
11INTENSITY OF RIVALRY BETWEEN FIRMS IN THE INDUSTRY Nike had intense competition with then market players like Adidas, Puma, Fila etc. The competitors were also engaged in aggressive differentiation strategies. Nike, with respect to its competitors, had strong market position and brand identity Nike was engaged in celebrity endorsements and it offered cutting edge products to its customers The negative publicity in 1990-2000 severely injured the company’s image and gave edge to the competitors to rise and take part in the negative publicity.GOING GLOBAL BENEFITS NIKE Nike, with 41% market shares (Reuters, 2010), dominates the global market for theathletic footwear and apparel earned the revenue of $ 19014 million in year 2010 (financialreport, 2010). The company is outsourcing all of its work without hurting the quality of itsproducts; Nike still is a market leader. The international sales of the company are more than 60%of its total revenue enabling the company to receive 51% gain in the profit (business week,2007). Going global has benefited Nike through various aspects the chief ones among them areincreased market share and customer base. Going global offers the advantage of targeting newgroup of customers whose preferences meets Nike’s products and reduced labor costs. The company forecasts rise in its revenue up to 40% by the year 2015 by opening newstores and penetrating new markets where the Chinese markets are of great importance (Reuters,2011). The Nike’s Chinese business units are currently earning more than $ 2.4 billion for its
12products and the company executives expects that this rate will double within next five years(Reuters, 2011). This athletic shoe and cloth manufacturing giant has gained substantial growthin emerging markets by offering and marketing its non Nike brands in markets like Turkey,Russia and Brazil (wikinvest, 2011). The company has adopted the strategy to open small number of outlets in United Statesand sell through national retail outlets. The Chinese markets have few malls available currently,therefore, the company has formulated different strategy for Chinese markets. The Chinesemarkets have more than 5000 shops that focus single sport item. The completion is very less inchina resulting in less discount rate to the consumers and higher profit margins. This strategy haslead to more than 37% profit margin to the company in Chinese markets as compared to 23% inNorthern America (CNN money, 2011). The diverse product offerings are one of the biggestadvantages to Nike for its global expansion (business week, 2007). The global revenue of the company has increased a lot but the business practices in U.Smarkets are not very favorable as they were before the recession hit the country. The companyhas to face challenges like increasing costs, freight charges and fluctuating currency rates (NikeInc, 2011). The company’s success in the international markets is the collective effort to connect itsbrands to the emotions, culture, and endorsement with the local celebrities. Nike joined UnitedNations project to promote human rights in the year 2000 since then the global image of thecompany have improved enormously and earned it more than 1.1 billion dollars revenue from itsbusiness in Asia (Czinkota, 2008).
13WHITTINGTON’S SYSTEMATIC AND PROCESSUAL SCHOOLS OF THOUGHTS In 1977, Whittington proposed four different approaches that were targeted to measure aspecific period of time. He provided four indicators to measure those approaches. The indicatorsare: deterministic or emergent nature of people, single goal or pluralistic towards theachievements of goals, the style of their strategies, and the influence of those approaches on thepeople respectively.Indicators Processual SystemicDeterministic Deterministic EmergentSingle goal or Pluralistic Plural PluralStrategy style Crafted EmbeddedInfluences Psychology SociologyPeriod (decade of influence) 1970s 1990s Processual school of thoughts involves deterministic nature of people with pluralisticapproach towards their goals and strategies. The strategies are crafted for the organization andthis school of thought has direct influence on the psychology of people and the factors associatedto them. This approach took fame in the late 70’s. Systematic school of thoughts involves the emergent nature of people with the pluralisticthoughts towards the goals and strategies. They follow embedded style of strategy formulationand this school of thought has impact on the sociology and social lives of people and theinterlinked factors. This approach influenced late 90’s era.
14PROCESSUAL SCHOOL OF THOUGHT In Processual school of thought, Managers assume that they can intervene in the processand improve their chances of success in the markets in the future. This approach is based on thesituations and scenarios and the planning is done according to these scenarios.The scenario based planning may involve the following: Solving a current problem or giving solutions to the questions Implement the permanent solutions Mind opening of people The strategy to be strengthened To find a way out of a puzzled situation To communicate solutions to the problems To develop necessary skills to cope with the problem To teach the participants about the strategic dealing of situation Van der Heijen (2005) explains that future cannot be predicted and thus it is uncertain tous. He further states that we can interpret the events and develop a process theory to find out thereasons of its occurrence. According to him, we can learn from these situations and thesesituations guide our strategies. He considers these events and scenarios very powerful for thefollowing reasons: Reflects the uncertain situations Allows coherence from different disciplines of the world Findings are based on real life context
15 Provides the reasons of the occurrenceSYSTEMATIC SCHOOL OF THOUGHT Granovetter (1985) argued that the business is an economic activity which cannot becarried out separately from our social life. The economic activates we adopt are theamalgamation of our societal relations, family, country and profession. These societal relationshave great impact on our decisions and actions pertaining to them and these factors guide ourbehavior. Therefore the personal and social factors shape our economic activities and decisions. Huff (1990) further emphasized that these factors that guide our strategies are not relatedto cognition but to the culture. Culture is a social system which effects and get affected by ourlife, economic activities etc. (Gergen 1994). Whittington (1993) explained that the culture,history and societal norms have significant impact on our growth and investment in the business.From this it can be derived that the strategies are dependent on the culture. Rouleau & Seguin (1995) provided four different forms of approaches based on theorganizational theories. They believed that these strategies and theories have close connectionwith each other. According to them, this connection follows the same pattern to the studiesproposed by Whittington (1993). This school of thought emphasizes on the organizations as a open system whichtransforms input into outputs. This system took fame in 1960s and had a strong impact on themanagerial thinking about different techniques to relate company with external and internal
16environmental factors. This school of thought focuses on the whole organization, its involvementin the environment and its requirements to achieve the balance.NIKE’S APPROACH IN 1990-2000 Nike had to face lot of external criticism around the globe during 1990 and 2000. Therewere lots of activities in action against the companies, particularly Nike, to educate the peopleabout the bad practices of the company, their working conditions and low wage rates etc. Thenegative publicity had profound impact on the brand image of the company and companymanagement took reasonable steps to stop the impact to further destroy the brand image. Nike considered the external and internal factors, according to systematic school ofthought, in its consideration to cope with those activities against the company and its globalimage. The company took part in the Fair Labor Association (FLA) to ensure that the labor willbe given their rights, and assured the health and safety measures at work place. The low wage rates, poor working conditions were the external factors that hadinfluenced the company as a whole. Nike announced the code of conduct to be followed andmade it mandatory for it and its sub contractors. The company announced that it will hire peopleto monitor the activities of its sub contract factories to further ensure the code of conducts arefollowed and respect is given to the workers. The company further implemented changes toassure that the ventilation system, surgical masks, gloves, shoes, proper medication etc. to begiven to the workers working for the company. This strategy of taking things seriously and devising a corporate social responsibility forthe company had good impact on the over all image of the company and saved a great fortunefrom being ruined in terms of negative image. The company’s efforts to take action against its
17sub contractors and employing reasonable measures to create check and balance saved thecompany from lot of implications imposed on the company and its operations, thus, saving theface of the company and its revenue.
18MINTZBERG’S CULTURAL AND ENVIRONMENTAL SCHOOLS OF THOUGHT: ACOMPARISON SR CULTURAL SCHOOL OF THOUGHT ENVIRONMENTAL SCHOOL OF THOUGHT The cultural school of thought involves the The environmental school of thought involves 1. collective approach to the formation of the reactive approach towards the formation strategy. of strategy. 2. The cultural school of thought involves The environmental school of thought involves various groups and departments of an the reaction and response of external organization. The strategy is formulated by environment towards the operations and the collective and cooperative process of strategies adopted by the company. This understanding among the various school of thought is helpful to devise executives at an organization. The strategies in accordance of those responses. strategies formulated under this school of This school of thought considers the thoughts represent the views, ideas, culture environment as a prime actor towards the of the organization. strategy formulation and implementation. 3. This school of thought is based on the This school of thought is based on external factors, primarily on biology.
19 anthropology. This school of thought focuses on the roles The main focus is given to the factors that can4. of society, the belief system, values, norm affect the strategy formulation. Those factors and their relative importance in the process come from the external environment. of decision making and their impact on the strategies of an organization. This school of thought presents the factors that are resistant to bring the change within an organization and plays important role when it comes to mergers and acquisitions.5. Cultural school of thoughts is based on the Environmental school of thoughts is based on cultural norms and values of people, the external factors affecting the business of therefore, it can be vague to sometimes. the organization; this may lead to vague and The unclear views and understanding about un-clear issues that can hinder the implication the factors of society can further lead to the of strategies within the organization. The resistance towards the change. All the strategies formed on the basis of information collected via this school of environmental dimensions are less useful to thought can be used against the the company and are mostly unrealistic to the organization, its strategies and goals. company and its requirements. This school of thought often measures and
20 6. This school of thought measures the compares the contingency theory from the cultural dimensions of people, their cultural organizational perspective as well as the perspectives, appreciates inquiry and situation based leadership within the Ashridge mission model. organization.ENVIRONMENTAL SCHOOL- strategy formation as a reactive process The Proponents of this school of thought takes the strategy formulation process within anorganization as a reactive process initiated due to the external factors (Mintzberg, 1998). Theorganizational strategists try to understand the external pressures imposed on the organizationand considers environment as a primary actor.Figure 1- Business information in focus in environmental school
21 This school of thought sees environment as a main component of strategy developmentprocess. The organizations and their leaders consider the environmental forces before devisingtheir plans. This school of thought was emerged from contingency theory. The organizationaltheorists suggested that the organizations are affected by these factors at large. While theacademic theorists suggested that the strategies are affected by the political powers and theenvironmental factors. This school of thought states that the environment is has the central importance in thestrategy formulation process and the organizations must respond to these factors and adaptthemselves to the environment.NIKE’S STRATEGY IN 1996-2000 According to environmental school of thought, Nike’s strategies were greatly influencedby the external environmental factors. The rising criticism by the media in country had led Niketo re-formulate its strategies to meet the requirements of the people and the company. Thecriticism around the country, low wage rates, activists that foster the negative publicity of thecompany and various others had influenced the company’s ability to devise its strategies toaccord with these external factors and save its public image. The company underwent various strategic changes like its participation in PresidentClinton’s Apparel Industry Partnership (AIP) to develop certain measures to ensure that theapparel and footwear are not manufactured under sweatshop conditions. The AIP aimed tostrengthen decent and humane working conditions at workplace.
22 The company further launched its Corporate Social Relationship (CSR) strategy in thepublic to further strengthen itself as a responsible citizen and a company. The Nike’smanagement promised its commitments to environment and labor force with the public throughits CSR strategy. Nike participated in Fair Labor Association (FLA) as a next step of its positive publicityin the country and across the globe. FLA aimed to monitor the working conditions of thedifferent manufacturing companies including Nike to figure out what is happening there andinitiate reasonable measures to seize any wrong doing in the factories. These and other environmental measures attempted by Nike were part of itsenvironmental strategy to strengthen its public image against all the harm done by the criticismof the media and newspapers in 1990’s. These strategies were designed to cope with theenvironmental factors that affected the organizations capabilities.
23FINDINGS This study was conducted to study the market leader of sport gear and apparelmanufacturer in USA; Nike Inc, to understand the strategies adopted by the company to tacklethe worsening conditions it faced back in 1990 to 2000. The findings of the study revealed that the company had faced lot of criticism during latenineties. In order to save the face of the company the company management devised measuresand strategies to sustain the company in the market. The company had an edge over its competitors through aggressive marketing strategiesand it was continuously trying to face its brand image from getting hurt from the campaignsagainst the company. The company’s suppliers had very low bargaining power this helped thecompany to formulate the business plans of its own choice. The negative perceptions weredeveloping in the minds of buyers and this had seriously affected the buyers’ decision topurchase company’s products. The findings revealed that company engaged in various environmental causes and humanrights concerns to fight against the labor right issues and environmental pollution cases. Thecompany’s efforts saved it a lot of fortune. The comparison between the Mintzberg’s cultural and environmental school of thoughtsrevealed that Environmental school of thought was more closely related to the Nike’s efforts tosave its face and build a positive rapport across the globe.
24 Lastly, the analysis of Whittington’s systemic and Processual schools of thoughtssuggested that the Nike Inc was deploying systemic approach for the formulation of its strategiesand their implementation across its factories.
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