Nike, Competitive Advantages


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Nike, Competitive Advantages

  1. 1. MGMT65000 – Strategic Management – spring 2011 Test 1 By: Divya Mishra School of Management Purdue University Calumet Submitted to: Dr. Arifin Angriawan1|Page
  2. 2. Company profile & backgroundNIKE, Inc. is engaged in the design, development and worldwide marketing of footwear,apparel, equipment and accessory products. . It sells its products to around 18,000 retail accountsin the United States and through a mix of independent distributors, licensees and subsidiaries innearly 200 countries. NIKE is the largest seller of athletic footwear and athletic apparel in the world.The Company creates designs for men, women and children. The top selling product categoryincludes running, basketball, childrens, cross-training and womens shoes. It also designs shoesfor outdoor activities like tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling,cheerleading, aquatic activities, hiking and other athletic and recreational uses.Index membership Sector Industry EmployeesS&P 500 Consumer Cyclical Footwear 23,300ProductsNIKE sells sports attire and accessories relevant to each sport mentioned above as well as othersports-inspired lifestyle apparel, like bags, socks, sport balls, eyewear, protective equipment,basic sport equipment, etc.In addition to NIKE’s footwear, apparel, and accessories businesses, the Company sells productsunder other brand names in particular markets. NIKE wholly-owns five footwear and apparelcompanies that specialize in different sports: Cole Haan, Converse Inc., Hurley InternationalLLC, Umbro Ltd., and NIKE Golf. These subsidiaries combined together account for 13% oftotal revenues, $2.5 billion, in fiscal 2009.Manufacturing Footwear & ApparelAll of NIKE’s footwear is manufactured outside the United States in the factories of China,Vietnam, Indonesia, and Thailand and account for 98 percent of total NIKE brand footwear in2009. The main raw materials used in NIKE footwear are rubber, plastic compounds, and foamcushioning materials, nylon, leather, canvas, and polyurethane films used for cushioningcomponents.NIKE brand apparel is also manufactured almost entirely outside of the United States, in 34different countries. The main materials used in NIKE apparel are natural and synthetic fabricsand threads, plastic and metal hardware, and water and heat resistant fabrics.Marketing and AdvertisingNIKE places a significant weight on marketing the company and its products. NIKE aggressivelybonds the contracts with highly successful and influential athletes, coaches, teams, and leagueslike Michael Jordan, Serena Williams, and Tiger Woods to popularize its footwear, apparel andsports accessories.In order to sustain its dominance in the industry and stay competitive stay, NIKE activelyresponds to trends and changes in consumer preferences by adjusting the mix of existing productofferings, developing new products, styles and categories, and influencing sports and fitnesspreferences through aggressive marketing. Its primary areas of marketing remain Net TV andmagazines.2|Page
  3. 3. CompetitorsThe rivalry in the sports wear industry is very high. NIKE competes with numerous athletic andleisure shoe companies worldwide. It faces fierce competition in product offerings, technologies,marketing expenditures, pricing, costs of production, and customer services. The maincompetitors are Adidas, Reebok, Timberland, Woodland, and Puma.SWOT Analysis for NIKE Strengths Weaknesses Brand recognition Overseas manufacturing High product quality dependency Effective marketing Decreasing United States strategy market share Capacity of innovation High product price Strong distribution chain compared to Adidas Strong R&D Currency exposure Strong customer Medium retail presence relationship/satisfaction SWOT Analysis Opportunities Threats Expansion into emerging Fierce industry competition markets Revenue relies on Increased demand in product consumers’ discretionary innovation income Growing segment of women Economic rescission athletes Fluctuation in the currency Increase in the number of sports events like Olympic, FIFA3|Page
  4. 4. NIKE Innovations NIKE with Apple: The NIKE+ package consists of a pair of specially designed NIKE+ running shoes, an iPod nano, and a NIKE + iPod sport kit. The kit consists of a sensor that fits into a built-in pocket beneath the insole of the left shoe and a receiver that fits into the iPod nano dock connector. As a person runs, iPod tells the distance, pace, and calories burned via voice feedback that adjusts music volume as it plays. (Google image) Design your own shoes: NIKE allows customers to design their own shoes from a catalogue of predefined designs. Customers can choose their own colors and mascots to create shoes which define their personality. It provides Touch screen technology in store allowing customers to design shoes of choice. (Google image) Nike self lacing automatic shoes: NIKE is also coming up with the new automatic self lacing sneakers. The automatic lacing system provides a set of straps that can be automatically opened and closed to switch between a loosened and tightened position.4|Page
  5. 5. Critical data of Nike Annual Report$ Millions 2010Net Income 1,906.7Current Liability 3,364.2Total Assets 14419.3Tax Rate 24.2%Interest Rate 6.35%Long-Term Debt 445.8Return on Equity 19.54%Total Equity 9753.7Weighted Average Cost of Capital 8.9%Capital Employed 11055.1Interest Expense 6.3EBIT 2516.9NOPAT 1907.81Return On Capital Employed 20.7%Economic Value Added 1267.25Cash Flow From Operations* 3164.2Capital expenditure* 335.1Free Cash Flow 2045.31Five year Nike stock performance vs. S&P500* (Fiscal year 2006-2010) 2% Nike S&P500 90%5|Page
  6. 6. 2010Nike revenue growth 2006-2010 Nike Revenue 25000 20000 Revenue 15000 10000 5000 0 2006 2007 2008 2009 2010 YearNike revenue generation by product 2010 Revenue Generation by Product 6% 34% Footwear 60% Apparel Equipment6|Page
  7. 7. 1. Please use Figure 2.3 page 53 (Grant’s textbook, 7th edition) as your overall guide to draw a balanced scorecard for the firm. Please draw a balanced scorecard for the firm that you choose. Identify all four perspectives, each perspective’s objectives and their relationships. See example in the appendix. Feel free to modify it. On the other pages please elaborate on the four perspectives and their elements. For the financial performance perspective, at least you need to discuss: ROCE, EVA, and FCF. Conclude what the numbers mean to you as a manager (e.g. Good, bad, or neutral; and why). Why do firms need to prepare a balanced scorecard? (20 points) Balance Scorecard for NIKE 2010FINANCIAL GOOD--NEUTRAL • ROCE : 17.8% Neutral • EVA: 1267.25 millions Good • FCF : 2045.31 millions Good • ROE : 19.54% Good • Profit Margin :10.03% Good • NIKE growth: 7% vs. industry growth Good 4.5% Bad • High advertising cost Good • Better COGS% than competitorsCUSTOMER GOOD-NEUTRAL • Customer Satisfaction Good • Customer Loyalty Good • Customer retention ratio Good • Market Share Good • Competitive Price Bad • Number of Customers Good Good • Design own shoes optionINTERNAL GOOD • Marketing Innovative Products Good Celebrity endorsement Good Diversity of online product Good • R&D Integrated researches Good Product technology Good High quality product design Good • Good supplier relation Good • IT for inventory control Good7|Page
  8. 8. LEARNING-GROWTH GOOD-NEUTRAL • Decreased revenue growth by 0.84% in Bad-neutral 2010 • Less capital investments and enhanced Good customer satisfaction • Technological improvement in products Good testing • Strategy for managed high service within the industry Good • Productivity gain Good • Increased product innovation Good • Moving & growing in fitness and training clubs Good Financials: The financials of Nike indicate healthy performance in the present scenario, except for few concerns. The ROCE is impressive. It has improved from 17.8% in 2009 to 20.7% in 2010. But has decreased since 2006. The financial crises of 2009 can be the reason of fall in ROCE. The FCF is $2045.31 million. The FCF shows healthy growth. The EVA, profit margin and ROE have improved from 2009 values. This reflects a healthy growth of the company in the industry. The only concern is the high advertising and promotion expenses due to celebrity endorsement. Nike’s heavy investments in advertising and promotions leave less cash on the table for other operations, resulting in less cash turnover ratio. Thus the balance scorecard from the financial standpoint looks neutral-good. Customer: NIKE focus has always been on the customer satisfaction. It invests a lot in its product research and development in order to offer better sports apparels to the customers. It has always striven to provide a competitive edge to foster the best possible performance in its athletes. The researchers work on the three primary area: Biomechanics (study of human movement), Physiology (study of the integration of the body’s energy systems and responses to the environmental stresses), and Sensory/Perception (subjective evaluation of product attributes, usability and durability). Its innovation in products includes “NIKE with Apple”. It aloes provides touch screen facility in its stores, allowing customers to design shoes of choice. Due to great product quality, product innovation, the customer satisfaction and customer retention for NIKE is very high. The only criterion where the company faces tough time is its high competitive prices. The competitors like Adidas, Timberland offer products at lower price compared to NIKE. Thus the balance scorecard shows that NIKE is good-neutral in the customer satisfaction. Internals: NIKE’s efficient internal operations are reflected through its better financial ratios. The key success factors associated with NIKE’s success are its distinctive marketing capability, volume manufacturing capacity, extensive research and development effort to design premium concert athletic products for customers, product differentiation and innovation and distribution capabilities. Marketing capability through celebrity endorsement has always been the core competency of NIKE. Its efficient8|Page
  9. 9. distribution capacity and use of IT to control inventory can be seen in better inventory turnover ratio. Thus the balance scorecard shows that NIKE is doing good in internal operations Learning & Growth: NIKE has shown a consistent growth every year. The forecast for 2011-2014 also reflect that it will continue to grow approx 7% every year. The sales and revenue of the company has increased. Though the sportswear industry is at the maturity stage of the product life cycle. The market is basically experiencing a slowdown in sales growth because the products have achieved acceptance by their most potential buyers. Through a number of strategic plans, NIKE has been able to cut cost and maintain the product quality. Its technological improvement and growth in products like “NIKE with Apple” and “design your own shoes” has enhanced the customer satisfaction. But the year 2010 has shown some drops in the financial ratios and increase in the cost structure. NIKE has the core competencies, resources and the capability to change odds into evens. With the help of its core competencies and strategic it will continue to grow and offer improved and high products to the consumers. The balance score card shows good in terms of learning and growth.Thus NIKE appears to be medium –high attractive.A balanced score card helps to maximize the long term goals. The company is able to evaluatetheir corporate path with the balanced score card. The four key questions that can be answeredby the balanced scorecard are: 1. How do we look at shareholder? 2. How do customers see us? 3. What must we excel at? 4. Can we continue to improve and create value?(Grant, 2010)9|Page
  10. 10. 2. Draw a table to show some potential threats and opportunities of the six sectors of the general environment. The six sectors are seen in Figure 3.1. Page 65. Apply Figure 3.3 page 70 and Figure 4.1 page 98 to summarize the industry five forces and their elements. On other pages, please elaborate on the forces and their elements. Which of the Porter’s five forces has had the biggest impact? Apply Figure 3.6. Page. 88, Table 3.3. Page 89 or Figure 3.7. Page 90 to identify the key success factors of the industry. Why do firms need to perform five forces analysis? Please elaborate on one threat that you think is the most important. Please elaborate on one opportunity that you think is the most important. You can conjecture about the timing and impact of the threats or opportunities. Please describe how that threat and opportunity impact the firm through its industry five forces. (20 points) The threats and opportunities are the external factors which affect the performance of a company. Threat and opportunity are external to an organization. NIKE is facing some threats that could have a significant impact on its financial performance and growth. At the same time there are also promising opportunities that provide a strong growth prospect for NIKE. The Six Sectors of General Environment National The Natural &Internation Environment al Economy The Industry Environment Technology Suppliers Demographic Competitors Structure Customers Government The Social & Politics Structure10 | P a g e
  11. 11. INDUSTRY ENVIRONMENT THREATS OPPORTUNITIESANALYSISGlobal Economy Economic recession/ International expansion, Consumer purchases slowing building upon its strong down/ Falling international global brand recognition; economy; fluctuation in strong economic conditions in foreign currency & exchange other countries ratesTechnology Use of IT in marketing information system; Scientific research in products quality & innovation like Motion Analysis (kinematics), Foot- pressure Measurement, Ankle Range of Motion etcGovernment/Politics Increased legislation/Higher Macroeconomic stability, low price of products, Customer interest rates, stable currency right conditions and the international competitiveness of the tax systemNatural Environment Natural disasters like Cold/Rainy climatic condition earthquake in Japan resulted creates a demand for shoes. in loss of lives, resulting in customer lossDemographic Baby boomers pushed into Young generation inclination late forties are less inclined in sports & fitness; large for sporty activities like population more customers; running; lower income of high income customer buying customers; ethnic mix of at premium price some countriesSocio-Cultural Inclination towards fitness leading to demand for fitness products particularly exercise apparel, shoes and equipments Biggest opportunity for NIKE Product development offers NIKE a great opportunity. NIKE, being a sports brand, attracts the sports as well as non-sports population. The brand is intensely defended by its owners11 | P a g e
  12. 12. who truly believe that NIKE is not a fashion brand. But the consumers that wear NIKE product do not always buy it to participate in a sport event. For the younger generation i.e. youth especially, NIKE is a fashion brand. This creates its own opportunities since product could become unfashionable before it wears out i.e. consumers need to replace shoes. Since NIKE is seen as a fashion brand by the youth culture, it can also develop products such as sport wear, sunglasses and jewellery. The youths spent a large amount of money in these accessories. Therefore such high value items can be a great opportunity for high profits. Biggest threat for NIKE The greatest threat for NIKE is the inevitable stiff competition from other sports brand, especially Adidas. NIKE operates in the sports shoe and garment industry which is one of the most competitive marketplaces. For a company to succeed in competition there is a continuous need to develop new products with higher quality than its competitors. The dynamic needs and demands of consumers serve as a challenge to the management. Competitors like Adidas and Puma are developing alternative brands to take away NIKEs market share. They compete with Nike in product design, quality, technology, advertising and competitive price. Significance of Five force analysis Porter’s five forces of competition framework view the profitability of an industry as determined by the five forces of competitive pressure. It is a simple but powerful tool for understanding where power lies in a business situation. It helps a firm in understanding its current strength in the industry. It also brings into light the strengths of the competitors. With a clear understanding of where power lies, a firm can take reasonable advantage of a situation of strength, improve a situation of weakness, grab the opportunities and keep away from taking wrong steps. This makes it an important part of planning a strategy for any firm in any industry. At the same time, the tool helps in identifying whether new products, services have any future prospect and the potential to be profitable. Five forces analysis for NIKE Threat of entry (Low-moderate) Buyer Power Rivalry Supplier Power (High) (HIGH) (Low) Threat of Substitute (LOW)12 | P a g e
  13. 13. RivalryThe rivalry among existing competitors in the footwear industry is very high. Large firms such asNIKE, Reebok and Adidas have grown immensely and established their foot firmly in theindustry. These firms are also globally recognized and have a huge loyal customer population.The firms also engage in online selling, allowing them to increase sales while minimizingoperating costs. The giant firms of the industry invest heavily in building a strong brand identity.The competition is fierce and thus the rivalry is very high.Threat of SubstituteThe substitution for the athletic footwear is low, as there are little alternatives available to choosefrom. The other substitutes available in the footwear industry are boots, flip-flops, and sandals.But these cannot be used in place of sports shoes, in any sporty event. For instance, a soccerplayer would not wear boots or flip flops to play soccer. Therefore, there are no real substitutesfor athletic footwear. And similarly there are lesser substitutes available for athletic garments.Threat of New EntrantsNIKE has always striven to provide a competitive edge to foster the best possible performance intheir athletes. This is the reason NIKE continues to lead innovation in footwear, apparel, andequipment. NIKE is a globally recognized brand and has a huge population of loyal customers.For the younger generation i.e. youth especially, NIKE is a fashion brand. Even being a sportsbrand, it attracts the sports as well as non-sports population. One of the major reasons NIKE is sosuccessful in popularizing its footwear, apparel and sports accessories is because it hires sportscelebrities as their spokespeople, including legendary basketball player Michael Jordan, SerenaWilliams, Tiger Woods. Thus threat of new entrants is low for NIKE.Bargaining Power of SuppliersThe raw material required to produce sport footwear are leather, rubber, and cotton. These areavailable in the market in abundance. At the same time there are many suppliers of such rawmaterials in the industry. NIKE definitely has an advantage over their suppliers. Thus thesuppliers are dependent on the firms like NIKE and Adidas as their means of their earnings. Thusthe supplier power of the suppliers is low.Bargaining Power of BuyersThe power of buyers in the footwear industry is distributed among several companies. There area large number of buyers relative to the number of firms in this industry. For a company tosucceed in competition there is a continuous need to develop new products with higher qualitythan its competitors. The price of NIKE products is comparatively high as compared to the otherbrands. Customers are price sensitive. There are other options in sports footwear available in theindustry at a lower price. Thus the bargaining power of buyers is high.13 | P a g e
  14. 14. Porter’s force which has the biggest impactThe Porter’s force that has the biggest impact on NIKEs is the rivalry. It faces fierce competitionin product quality/technology, competitive price, marketing capability/celebrity endorsement,distribution and manufacturing. The sportswear industry is highly competitive and rapidlychanging. At the same time, industry is at the maturity stage of the product life cycle. The marketis basically experiencing a slowdown in sales growth because the products have achievedacceptance by their most potential buyers. In such conditions, it is very difficult for any companyto sustain its competitive advantage. For a company to succeed in competition there is acontinuous need to develop new products with higher quality than its competitors. The everchanging needs and demands of consumers serve as a challenge to the firm. Therefore NIKEinvests heavily on R&D, to offer innovative products and services, in order to stay consumer’sfirst choice.Key Success FactorsKey success factors are most significant to future success of a firm in industry. The KSFs forNIKE are its distinctive marketing activities, extensive research and development effort to designpremium concert athletic products for customers, product differentiation and extensivemanufacturing, innovating and distribution capabilities. Superior performance in some or all ofthe factors creates a lot of value for the customers.14 | P a g e
  15. 15. 3. Identify and describe the firm business strategy (Porter’s generic strategies: Figure 8.5. page 224) and business model (Read Johnson, Christensen, and Kagermann, 2008, Reinventing Your Business Model, Harvard Business Review). You can also further discuss how the strategy or business model supports the firm’s FCF value drivers. Read file FCF drivers.doc (20) Business Strategy of NIKE A firm can achieve a higher rate of potential profit over its rivals in one of two ways: either it can provide identical product or service at a lower cost, or it can supply a product or service that is differentiated in such a way that the customer is willing to pay a price premium that exceeds the additional cost of the differentiation (Grant, 2010). The generic business strategy for NIKE is a product differentiation strategy. NIKE emphasizes on the key strategy elements of branding advertising, design of products, exclusive customer service, high quality products and new product development (Grant, 2010). Cost Advantage (Similar products at lower cost) Competitive Advantage Differentiation Advantage (Price premium and unique product)NIKE is the leader of industry in product differentiation. Product differentiation helps companyto boosts its profit through the sale of different product. The other advantage of producing anumber of product lines is the reduction of risk in that if one product fails there are numerousother products to compensate for this loss (Equity research, 2003).NIKE designs most of its footwear for athletic purpose. In order to diversify its products, a largepercentage of their products come from sales of footwear, apparel, and accessories for casual andleisure purposes.NIKE differentiates its products in a variety of ways. Firstly, it manufactures sports goods forthree different segments of people: men, women and children. Each of these three segments iscarefully analyzed on the basis of needs, physiology, design preference and trend of choices.Secondly NIKE also differentiates it products by offering a variety of footwear accessories andapparels like NIKE watches, gym bags, sport balls, timepieces, eyewear/glasses, bats, gloves andskates. It also provides every type of sports equipments like basketball, tennis, soccer, football,golf, aquatic activities and others (Equity research, 2003).NIKE also has the licensees to manufacture and sell NIKE brand products aside from athleticfootwear and accessories. The product differentiation is achieved by the company through thesale of products like children’s clothing, school supplies, electronic media devices, timepiecesand other items under NIKE brand name. This requires a consistent strategic managementplanning.15 | P a g e
  16. 16. NIKE subsidiaries, like Bauer NIKE Hockey Inc., are another way by which the company differentiates its product line. In addition to NIKE’s footwear, apparel, and accessories businesses, the Company sells products under other brand names in particular markets. NIKE wholly-owns five footwear and apparel companies that specialize in different sports: Cole Haan, Converse Inc., Hurley International LLC, Umbro Ltd., and NIKE Golf. These subsidiaries combined together account for 13% of total revenues, $2.5 billion, in fiscal 2009 (Lancellotti, Ruiz, 2010). Thus with the help of resources and capabilities like strategic innovations in marketing abilities, product engineering, product innovation and creativity and research capabilities; NIKE provides high quality sports products to the consumers. NIKE product differentiation StrategyLicensees to produce & Men, Women & children NIKE’s wholly-owned Accessories/Apparelssell NIKE brand products on the basis of needs, five footwear & like gym bags, eyepiecesaside from athletic physiology, design apparel companies & Sports equipments forfootwear & accessories preference &choices trend specializing in sports almost all sports School Cole Haan supplies Converse Inc Children’s clothing Hurley Electronic International LLC media device Umbro Ltd NIKE Golf Business Model The business model consists of four interlocking elements that are taken together to create and deliver values to the customers as well as the company. The four elements are: i) Customer value proposition iii) Key resources ii) Profit formula iv) Key processes 16 | P a g e
  17. 17. Customer Value Proposition (CVP) Target customers Jobs to be done Offerings Athletes Provide the most efficient Ground-breaking apparel & Health/Fitness products to foster the best footwear with cutting edge segment possible performance in technology , distinctive Women segment athletes; remove access ,skill & marketing to appeal more time barriers customers Profit formula Revenue: The revenues are projected to increase by 5-6% every year till 2014; NIKE has a large market share to generate revenue. Innovative products bring profit for company. Cost structure: Invests heavily in R&D & marketing; lower manufacturing, labor & material cost due to outsourcing; low Key resources of NIKE distribution cost due to Efficient distribution capability employees Resource velocity: Good asset Strategic productivity ratios indicate NIKE effectiveness in deploying its marketing assets. Higher the ratios, better is innovations the performance of the company. Distribution network Integrated research laboratories Reputation in industry Key processes Processes: Highly innovative product design, volume manufacturing, outsourcing for manufacturing, distinctive marketing strategy, effective IT, distinctive R&D, periodic training of employees, tight financial controls(Johnson, Christensen, and Kagermann, 2008)17 | P a g e
  18. 18. NIKE removes the access barrier by proving products in store as well as online. It removes thetime barrier by delivering the products faster due to its excellent distribution capabilities. It alsoreduces the skill barrier by offering a high product quality, technologically advanced applicationlike “NIKE with Apple” or “design your own shoes”. Its products are high priced; so it does notremove the wealth barrier. But more factory outlets stores indicate its efforts to lessen the wealthbarrier.The value drivers for a firm are sales growth, operating profit margin, cash tax rate, net workingcapital/sales, fixed assets/sales, other long term assets/sales, and cost of capital. NIKE has highsales growth compared to others in the sports apparel industry. This is due to its large marketshare. Its operating profit margin is also more than 5, which reflects profitability and effectiveperformance. Its asset productivity ratios like fixed asset turnovers are also very impressive. Thetax rate is 35%, which is favorable for NIKE, but can be improved. If NIKE also focuses on theprice sensitive segment of consumers by offering its products at a cheaper price at places like thefactory outlets, it can attract a large segment of consumers. This can increase its market share,resulting in increased profit margin.18 | P a g e
  19. 19. 4. To what extent is the firm’s performance attributable to the industry attractiveness and to what extent to the firm’s competitive advantage? Use Figure 2.1. Page 47 (see also Capsule 2.3.) to assess the firm’s competitive advantages/ disadvantages. Draw the firm’s ROCE tree (disaggregation/ DuPont formula). Competitive advantages are better ratios of ROCE breakdown. (20 points) The ROCE tree diagram is according to the data of 2009 COGS/Sales NIKE: 55.13 ADS: 54.16 Net Margin Deprec/Sales NIKE: 7.75 NIKE: 1.81 ADS: 2.36 ADS: 2.88 SG&A/Sales NIKE: 30.26 ADS: 42.20 ROCE NIKE: 17.8 ADS: 11.31 Fixed Asset Turnover NIKE: 7.32 ADS: 2.8 Inventory Turnover NIKE: 8.13 Asset ADS: 7.05 Productivity NIKE: 1.44 ADS: 1.16 A/R Turnover NIKE: 6.90 ADS: 6.07 Cash Turnover NIKE: 8.21 ADS: 13.3919 | P a g e
  20. 20. The firm’s attributable to the industry attractiveness and its competitive advantage can beexplained through the ROCE diagram.ROCE is an indicator of the effectiveness of the firm in generating profits from its asset. Itreflects the efficiency and profitability of a companys capital investments. The ROCE for NIKEis 16.10 which are higher compared to ROCE of Adidas (11.30). This shows that NIKE isgenerating more profits over its assets and liabilities.Net Margin is a ratio of profitability and indicates how much out of every dollar of sales acompany actually keeps in earnings. It is very useful tool in comparing two companies in thesame industry. Net margin greater than five reflects profitability. A higher net margin of NIKEreflects that it is more profitable and has a better control over the costs compared to Adidas.Adidas on the other hand has the net margin less than 5, which reflects that the company is notgenerating attractive earnings.NIKE has better control over costs compared to Adidas; which is reflected in its lower SG&A.The COGS% for both NIKE and Adidas is comparable. It means that both the firms are doingwell in maintain the cost of goods sold.Asset productivity ratios like inventory turnover, cash turnover, fixed asset turnover,receivables turnover indicate how effectively a company deploy its assets. The ratios describe thesales dollars generated per unit of resources. Higher the ratios, better is the performance of thecompany.The asset turnover ratio is the amount of sales generated for every dollar’s worth of assets. Theinventory turnover is a ratio showing how many times the inventory is replaced. NIKE isdeploying its assets better than Adidas to generate sales dollars. A/R turnover ratio is a measurethat describes quantifies a firms effectiveness in extending credit as well as collecting debts. Thenumbers show that both NIKE and Adidas are doing well, with NIKE having an upper hand overAdidas. The cash turnover reveals whether a company can finance their current operations. Thenumbers show that Adidas is more efficient in financing its current operations than NIKE. Thehigher inventory turnover ratio for NIKE indicates that it has a good control over its inventorymanagement. The inventory management of Adidas is also good but it is less than NIKE. Thismeans that NIKE is doing better than Adidas in inventory control.But at the same time NIKE also has some competitive disadvantages like poor cash turnoverratio. NIKE should also try to improve its A/R turnover ratio.Overall, the study of financial ratios indicates that NIKE is performing better than Adidas.The ROCE tree diagram shows that the position and performance of NIKE in the industry ishighly attractive.20 | P a g e
  21. 21. 5. a) Use and adapt Figure 5.4 page 133 or similar diagram to describe the firm’s value chain. In which of the firm’s functions (e.g. purchasing, distribution, marketing, IT, HR, etc.) do/es the firm’s competitive advantage/s lie (i.e. what functions that contribute to the better ratios in question 3 or what is the core competences of the firm)? In which what of the firm’s functions do/es the firm’s competitive disadvantage/s lie (i.e. what functions that contribute to the worse ratios in question 3)? (10 points) Value Chain Analysis-Value chain analysis is a systematic way of examining all the Value ystematic organizations functional activities and how well they create customer value value. Value chain diagramPrimary Activities Support Activities Inbound Logistics Firm Infrastructure Low production cost Empowerment of top management Outsource non-core activities core Great financial discipline with low Inventory control and reduced debt inventory risks due to efficient Strong brand, product, marketplace supply chain tools solution, delivery and support Focus on product design, Effective compliance process marketing and product through strategic knowledge and technology verification NIKE IHM specialized in Calculated risk factors rubber, foam and raw material Human Resource Management Operations Core values of honesty, Heavy investment in R&D competitiveness and team work Low and no packing options Minimum hierarchy concept21 | P a g e
  22. 22. NIKE personals to assist factory Great management and efficient management corporate strategy globally Efficient network structure of Blend of new hires and promotion operations management High ethical values among No heavy metal, glue or solvent employees used Well monitored labor audit add Outbound logistics brand audits Strong control over own distribution channel Technology Development Good supplier relation, Great product technology like Ability of forward integration Motion Analysis, metabolic rate, Use of strong Servers to support blood work. and manage supply chain projects Air-sole technology expert Touch screen technology in store Marketing & sales allowing customers to design shoes Brand recognition and reputation of choice Celebrity endorsement Huge sales through e-commerce Higher allocation on marketing budget Procurement Strong customer base Just in time strategy as finished Diversity/Variety of products goods are shipped as soon as they offered online are ready for sale Buffer and safety stock in hand Services Use of IT to improve customer service Great product quality resulting in increased customer satisfaction Touch screen technology in store allowing customers to design shoes of choiceNIKE has always provided the most efficient products to foster the best possible performance intheir athletes. This is the reason NIKE continues to lead in innovation and technology infootwear, apparel, and equipment.The first better ratio is COGS/sales. It is a function of the competitive advantage of costefficiency. NIKE has a good control on production cost. The second better ratio is SG&A whichmeans that NIKE has lower selling and administrative cost over Adidas. Thus it has acompetitive advantage of effective in store operations. NIKE has a better asset turnover ratiocompared to Adidas. This means that NIKE generates more sales for every dollar’s worth ofassets. The asset turnover ratio is a result of the competitive advantage efficient operations. Thebetter inventory turnover reflects the competitive advantage of efficient inventory management.The firm’s competitive advantage is brand recognition, effective inventory management,efficient in-store operations, and cost efficiency. The competitive advantages of NIKE lie infirm’s R&D, Operations, Information technology and Marketing functions. NIKE is deployingits core competencies/ capabilities/resources better than Adidas to generate profitability..22 | P a g e
  23. 23. b) Then propose hypotheses on HOW the principal functions or their interactions create the firm competitive advantages and disadvantages. The followings can help: Figure 2.2 Page 51; Figure 3.7. Page 90; Table 5.3. Page 132; Figure 5.4 pages 133. You can utilize sources of cost and differentiation advantage discussed in chapter 7, 8, and 9. You can also draw a map that relates (use arrows) principal capabilities to competitive advantages. See Textbook Table 5.3 for examples of organizational capabilities. This is very important exercise because basically strategy is about the exploitation of core competence. (10 points) Competitive Brand Cost Inventory Innovation & Effective Advantage recognition Efficiency management Product operations and (Better cogs (High Inventory Quality (SG&A %) reputation %) turnover) (High profit margin) Capabilities Product Distribution Relationship Financial Asset design capability Management Control management capability & strategic outsourcing Resources Reputation Efficient Integrated Distribution & Strategic Employees Research Subcontractor innovation laboratories Network Manufacturing Distribution & Marketing & Information Technology Operations Customer corporate functions Resource Service Human R&D sales23 | P a g e
  24. 24. The above diagram shows the interaction between the NIKE’s functional units, its resources andcapabilities and competitive advantages. Some of the competitive advantages are explained asfollows:i) High product quality: The R&D of NIKE results in the competitive advantage of innovationand high product quality. The firm has product design capability, which is due to its highlyefficient integrated research laboratories. NIKE invests heavily in having researchers perform anumber of scientific techniques to quantify their findings (Equity research, 2003). Amongnumerous tests performed, here is a list of some exams NIKE’s athletic shoes are tested for: Motion Analysis (kinematics) Foot-pressure Measurement Ankle Range of Motion Metabolic Cart Heart-rate monitors Blood-workNIKE heavy investment into the functional area of R&D and Information Technology results inthe competitive advantage of high and innovative product quality (Equity research, 2003).ii) Inventory turnover ratio: The other example is the competitive advantage of high inventoryturnover which is due to the deployment of IT and efficient distribution/subcontractor network ofNIKE. High inventory turnover is due to the distribution capability of NIKE. The distributioncapability of the company is so efficient because of the core competency ofdistribution/subcontractor network. Finally, the efficient distribution/subcontractor network isconnected to the presence of the functional areas of distribution & sale and informationtechnology. NIKE invests in IT to keep a track of the inventory control.iii) Better SG&A ratio: NIKE has good SG&A ratio. But on the contrary NIKE spends lot inmarketing and advertising. Thus Nike has a high direct cost. But to compensate the high directcost, it outsources the product manufacturing. NIKE does not have any factory in the homecountry (USA) where the operating costs are high. All the company products are manufacturedin countries like Thailand, Vietnam, and Indonesia where the labor cost, material cost, and otheroverhead costs are very less. The company saves a lot of money in employee salary,material/labor/overhead costs and other indirect cost. This results in a lower SG&A cost.c) Also write what other competitive advantages the firm could possess given the observedresources and capabilities. Also write the sources of the competitive disadvantages.Basically identify what those competitive advantages that the firm should have given theresources and capabilities. (10 points)Competitive Disadvantage and sources:Poor cash turnover: NIKE has a lower cash turnover compared to Adidas. The cash turnoverreveals whether a company can finance their current operations. NIKE pays most of its earningsin dividends and also invests a lot in its R&D and advertising. One of the reasons for a lowercash turnover ratio for NIKE can be its heavy investments in advertising and promotion. NIKEplaces a significant emphasis on marketing the company and its products. NIKE hires sportscelebrities as their spokespeople, including legendary basketball player Michael Jordan, SerenaWilliams, Tiger Woods, which require lots of cash investment. NIKE has a huge cash dividendpayout, which is increasing gradually every year. Thus it has lesser cash available to finance itsother operations.24 | P a g e
  25. 25. Weaker retail presence: NIKE is the globally recognized brand. It has a strong online presence.But it has small retail presence. Thus the accessibility of the products can be increased to a greatextent if NIKE offers more store/retail presence. This would remove the accesses barrier and itwill add to the customer value proposition.The competitive advantages that NIKE should have given the resources and capability areshown in the table below: Competitive Advantage/ Core competence/ Explanation disadvantages problem/ Value chain activities Better Cash turnover Financial control and Decrease spending on strategic innovation endorsement and celebrity, increase cash balance by long term loans, less dividends payments Better receivable turnover ration Financial control and Collect outstanding accounts operations receivable and ensure the timely collection of imparted credit that is not earning interest for the firm. Cost Leadership/Better Financial controls & The biggest challenge which competitive price asset management the firm faces. Its prices are fairly high compared to the others; focus on youth and non-athletes and offer a line extension for footwear & apparels that are not premium priced and are affordable to these segments Effective retail presence/ Asset management & NIKE has a weaker retail effective store presence effective operation presence compared to others in the industry. Focus on retail presence will be profitable. It will increase the product accessibility25 | P a g e
  26. 26. 6. To what extent can the firm’s core competences sustainably create competitive advantages for the firm? You can use Barney’s sustainability framework (valuable, rare, non-limitability, and non-substitutability). Read Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), 99. You can also use Grant’s Figure 5.6. Page 136. (20 points) COMPETITVE VALUABLE RARE NON- NON- ASSESSMENT ADVANTAGE IMITABLE SUBSTITUTABLE Brand Y Y N Y Sustainable recognition Cost Y N N N Temporary Efficiency Inventory Y N N Y Temporary management Innovative Y Y Y Y Sustainable Product Quality Effective in- Y N N N Temporary store operations a) The brand recognition of NIKE is the biggest strength for the company. It is valuable and rare for the company. But since the competition in the sports footwear industry is so high, it is difficult to say that the brand recognition is non-imitable. Adidas gives a very stiff competition to NIKE and has good financial ratios. The NIKE/others products are non- substitutable. The substitution for the athletic footwear is low, as there are little alternatives available to choose from. The other substitutes available in the footwear industry are boots, flip-flops, and sandals. But these cannot be used in place of sports shoes, in any sporty event. Therefore, there are no real substitutes for athletic footwear. Hence the brand recognition for NIKE is sustainable. b) The other competitive advantage which is sustainable is the innovative product quality of NIKE. A lot of technological and scientific research like air sole is deployed to produce the foot wears at NIKE.IT is constantly involved in the R&D, to produce better products to consumers. The competitive advantage is valuable and to customers as well as to the company. Even though there are other competitors, but NIKE has an upper hand in terms of its product technology making it non-imitable and non substitutable. c) The competitive advantage of cost leadership and efficient operations are temporary because other competitors are also doing well in those aspects. NIKE’s chief rival Adidas has a better cost advantage and over NIKE. The inventory management for Adidas is also appreciable, making the competitive advantages not non-imitable and non-substitutable.26 | P a g e
  27. 27. 7. Draw a Table to show the alignment of the firm’s goals (e.g. strategic measures of balanced scorecard such as EVA, market share etc), business strategy, underlying resources and capabilities, competitive advantage, and industry key success factors (Read: Figure 5.3 page 127 and Table 8.1 page 223). (20 points). The link of firm’s goal, business strategy, resources and capabilities, competitive advantage and key success factor External Environment Goals Government RegulationsWorld’s Leading Sports Global Economy and Fitness Company Competitive sports Industry Health &Fitness Trend Technological innovation in foot wears Business Strategy Product Differentiation Globalization Key Success Factor Distinctive Marketing Extensive R&D Product Quality Resources & Capabilities Financial control Competitive Advantage Product Design Capability Brand Name Reputation Strategic Innovation Product Quality Distribution Capability Inventory turnover Integrated R&D Cost leadership Efficient Employees Relationship Management Effective in-store operations In order to become the world’s leader in sports industry, NIKE has adopted the generic business strategy of product differentiation and global expansion in a strategic way to establish a leader position. Its strategies have been shaped by the external environmental factors like government regulations, global economy, and competition in industry, health / fitness trend and technological advancements in the sports products. The business strategies have also been shaped by firm’s competitive advantages. To develop and maintain its competitive advantages, NIKE deploys its resources and develops the capabilities to the fullest. So with the current resource/capabilities, NIKE can posses some more competitive advantages.27 | P a g e
  28. 28. 8. Describe the firm’s organizational structure, processes, systems, culture and functional strategies (you might need Table 12.5 pages 317 or Table 13.1 page 337) and how do they support the business model, strategy, competitive advantage, or goals. Draw a Table that summarizes your findings. (20 points). Goal World’s leading sports products and equipment provider Business Market high-end consumer products in sports and fitness Model manufactured in cost-efficient supply chains Business Encompasses the business’ overall positioning in the sports Strategies industry and stay competitive due to the Product differentiation and globalization Competitive Brand Name, Product Quality, Inventory turnover, Cost Advantage leadership, Effective in-store operations Functional departments such as marketing, production, R&D, Org. customer services, operations, distribution, human resource with Structure clearly defined jobs at all levels; collaborative, matrix organization with professional staff; teams work across footwear, apparel and equipment product engines; minimal hierarchy in organization Systems Automated inventory control; high-tech R&D system; automated warehouse and distribution systems Processes Highly innovative product design, volume manufacturing, outsourcing for manufacturing, distinctive marketing, effective IT, distinctive R&D, periodic training of employees, tight financial control Effectiveness of operations within its manufacturing, marketing, Functional product development, and customer service processes; highest Strategy service standard within industry; build loyal customer relationships around the world to improve its customer services Well-diversified culture; code of ethics for all Culture employees/suppliers/buyers called “Inside the Lines”; respect & value to employees; fast paced & high-tech culture; safe28 | P a g e working conditions for employees/workers
  29. 29. 9. What is the outlook for industry profitability during the five year period 2010 - 2014? What is the outlook for the firm profitability? What would be the key success factors? Will the present core competencies of the firm be obsolete? See Table 11.1 page 277. See also slides (“The Driving Forces of Industry Evolution” and “Preparing for the Future: The Role of Scenario Analysis in Adapting to Industry Change”) from Chapter 11. You need understand concept of future KSFs and driving force. Use Figure 3.6 pg. 88 (or Table 3.3 page 89, Figure 3.7 page 90). Develop two future scenarios and (1) how they impact of the industry key success factors (2) 1) how they might impact the SWOT or core competencies (20 points) Industry profitability during the five year period 2010 – 2014 The study of the annual reports and financial data indicates that the sports industry will be profitable during the five year period 2010-2014. The impact of the global economic recession of 2008-2009 on the sports apparel industry was significant. The biggest threat for any industry would be economic recession. As the economy slows, consumer purchasing power declines. The labor cost and material price also goes up during recession. The rivalry is very high in the sports wear industry. The fierce competition among the industry players lowers the margin for every company in the industry. Thus every company must maintain competitive advantage to grab market share and generate profit. The economic conditions are improving since 2010. The improved economic conditions will prove profitable for the companies in sports wear industry. The purchasing power of the customers will be improved. Consumers are becoming more knowledgeable and have more choices when it comes to sportswear than they did in the past. Today the consumer wants innovative and fashionable products, especially in apparels and technology. The key success factors on which the sportswear industry needs to focus, to sustain profitability in the future are; innovation and creativity in products and services; distinctive marketing; new unsaturated markets like Asian countries. Product/service Distinctive Distribution New KSF Quality & marketing capability unsaturated innovation capability markets Driving forces Product /service Emerging Government technology markets/unsaturated regulations/ market segments economic conditions Environment External Growing Health & Global economic Customer’s buying fitness trends conditions power/income29 | P a g e
  30. 30. Profitability of NIKE during five period 2010-2014 NIKE is a consumer product company and it is exposed to the consumer’s discretionary income. The decline in the disposable income of the consumers has adversely affected NIKE’s performance during the global economic crises. The macro-economic conditions like competition, politics, economy, socio-cultural trend and technology, together affect the profitability of NIKE. Now, more than ever, NIKE is expanding its global operations. NIKE’s sales are paid in several currencies, which increase its exposure to foreign currency exchange rates. Currency exchange rate fluctuations could also affect the business operation of NIKE. NIKE has a huge market in Asian countries like India and China. India and China are the fastest growing economies today. NIKE has realized double digit revenue growth in India, China and other Asian Pacific companies, in fiscal 2009 and 2010. These markets are not yet at the point of maturity, so high growth is expected in the near future. At the same time, the revenue growth in Europe and United States was also high. The projected costs of goods sold as a percentage of sales is slightly lower than the historical average due to sustainable cost cutting efforts in 2010. The revenue/sales are expected to grow at a rate of 6-7% every year till 2014. Thus the profitability outlook for the industry as well as NIKE looks attractive. NIKE will be a profitable company with good growth prospects, great cash flows, improved EVA & ROCE and high returns to shareholders through dividends. Revenue Growth Chart for NIKE Inc. Revenue Growth Forcast 25,000.00 20,000.00 15,000.00 10,000.00 Revenue 5,000.00 0.00 2010 2011 2012 2013 2014 Key success factors are most significant to future success of a firm in industry. The KSFscontributing toward the NIKE’s profitability in future will still be its distinctive marketingactivities, extensive research and development effort to design premium concert athletic productsfor customers, product differentiation and extensive manufacturing, innovating and distributioncapabilities. The core competencies and key success factors will stay the same, they will beenhanced. For example the product quality will be increased by better products and betterservices resulting in improved brand recognition. Thus the core competencies and the keysuccess factors will not become obsolete for NIKE.30 | P a g e
  31. 31. Scenario IThe future period of 2011-2014 has a great opportunity for NIKE to increase its brand loyalty,market share and revenue. The closest biggest growth opportunity for NIKE is the 2012 Olympicgames scheduled to be held in London. NIKE has turned its attention to London 2012 Olympicwith an ad campaign. NIKE is on the ball and announced it will extend its relationship with theU.S. Olympic Committee as an Official Outfitter of the U.S. Olympic and Paralympics Teams.NIKE promises to deliver ground-breaking apparel and footwear with cutting edge technology tothe athletes. NIKE is an official marketing partner of the U.S. Olympic Committee, whichguarantees significant TV exposure in the U.S, especially during such events as the basketballtournament. At the same time NIKE will replace Adidas division Reebok as the leagues officialuniform provider, giving the company even more exposure among local consumers.NIKE has been the best when it comes to advertising. Some of the celebrities who will advertisefor NIKE during the Olympics will be USA Basketball NBA stars like Kobe Bryant, LeBronJames, and Carmelo Anthony.In this scenario NIKE will embrace the key success factor of it distinctive marketing capabilities,innovation and distribution capability.NIKE is also coming up with the new automatic self lacing sneakers. The automatic lacingsystem provides a set of straps that can be automatically opened and closed to switch between aloosened and tightened position.Thus NIKE will embrace the key success factor of extensive research and development effort todesign premium concert athletic products for customers and product differentiation. NIKE self lacing automatics sneakers (Google image)Scenario IIThe United States is the largest and most saturated market for NIKE. The Company has beendirecting efforts on expanding into emerging markets which offer growth opportunities. It has ahuge market in Asian countries like India and China. India and China are the fastest growingeconomies today. NIKE has realized double digit revenue growth in India, China and other AsianPacific companies, in fiscal 2009 and 2010. These markets are not yet at the point of maturity, sohigh growth is expected in the near to mid-term futureNIKE has planned to expand its global retail foothold by opening 250 to 300 new stores over theworld by year 2014. NIKEs expansion plan includes a mix of discount-minded NIKE Factory31 | P a g e
  32. 32. Stores in outlet malls and NIKE town stores, which sell newer and exclusive items and are oftenfound in upscale shopping centers. It will also focus on the women-oriented stores to boost theproportion of its womens business from about one-fifth of total sales. Thus the company istrying to attract both the segment of customers i.e. price sensitive and premium class. NIKE’sstrategy is consistent with its business level strategy of product differentiation and expansion.In this scenario NIKE will embrace the key success factor of it distinctive marketing capabilities,innovation and distribution capability.Thus expansion in the emerging new markets and new segments of consumers will providegrowth opportunities for NIKE.The scenarios explained above are in synchronization with the SWOT of NIKE. The analysis isas follows: a) The biggest strength of NIKE is its brand recognition and brand loyalty. With the expansion into new emerging markets and focusing on the growing women athletes, NIKE will continue to hold its consistent brand recognition globally in all consumer segments. b) The global expansion is also an opportunity for the company’s growth. c) Product technology and innovation has always been strength and key success factor for NIKE. Its new automatic self lacing sneaker an innovation which will attract athletes and younger generation. d) NIKE advertising capabilities are also one of its strengths. Its plan to become an official marketing partner of the U.S. Olympic Committee, staring NBA stars is correlated to its distinctive marketing and advertising capability. e) The United States is the largest and most saturated market for NIKE. This is a threat for the company. Thus the Company has been directing efforts on expanding into emerging markets which offer growth opportunities.32 | P a g e
  33. 33. 10. In order to improve its performance, please explain how the firm can use its current (or revise or build) strategy and supporting resources and capabilities to seize the opportunity and defend against competitive and other. Make your recommendation to the firm (operational and strategic). Please capitalize your answers on your previous questions’ answers. You may use SWOT concept. You might need Figure 9.1 page 231, Figure 9.4 page 241, Figure 10.5 page 260 and Strategy Capsule 10.2. page 261. You need to read chapter 11 as well. If the firm that you pick is in high technology industry then you need to read chapter 12. If the firm that you pick is in mature industry then you need to read chapter 13. (20 points) Opportunities Threats Expansion into Demand for Revenue relies Intense on consumers’ competition emerging innovative discretionary market products income High dependency on Rise in the Foreign overseas number of Exchange manufacturing women athletes Risk & outsourcing Capitalize Defend Migrate Strengths Weaknesses Brand equity, global presence, product Currency exposure, decreasing market in quality, diverse product line, strong R&D, United States Distinctive marketing capability Strategy Product differentiation strategy, globalization/Expansion strategy, cost reduction/efficiency Operations 1. Achieve economies of 4.Market place 7. Foreign exchange 9. Continue expansion scale in manufacturing management to fight risk management operations outside the and distribution competition program to minimize home country 2.Continue with product 5. Improve financial volatility of currency 10. Work with innovation through controls for better cash fluctuations customers to design new NIKE Sport Research turnovers 8. Focus on women product idea & Lab 6. Social activities to athletes products strengthen relationship 3. Focus on online/retail strengthen brand image store presence33 | P a g e
  34. 34. NIKE operates in a highly competitive and rapidly changing industry. It is difficult for acompany to remain competitive and sustain profitability in this industry. Though NIKE has beena leader in the industry but it has some weaknesses and faces threats which could negativelyaffect its financial performance.Suggestions for NIKE to improve its performance, with its current capabilities/resourcesand business strategies are: 1) Improve the functional level strategies in manufacturing and distribution and customer service processes to improve operations in the company. 2) NIKE is the product innovator in the sportswear industry. It should continue with its product innovation through its Sports Research Lab. 3) NIKE competes with countless athletic and leisure shoe companies on a worldwide basis. It should strengthen its aptitude to discover and define product trends as well as foresee and respond to changing end user demands as promptly as possible to maintain market share. Thus it should focus more on market place management. 4) NIKE operates on global basis. It is exposed to fluctuating currency risk. It should adapt foreign exchange risk management programs to mitigate such risks. 5) It should to continue its expansion outside USA to take opportunities in the unsaturated foreign markets to improve performance and sustain leadership in the industry. 6) It should encourage its consumers to participate in product design like its touch screen technology in store allowing customers to design shoes of choice. This would also strengthen its customer relationship and enhance customer loyalty. 7) Focus on the unsaturated women athletes segment. It can also focus on the younger generation fashion clothing. 8) NIKE’s products are subject to risks associated with overseas sourcing and manufacturing. It should look for alternative sources of raw material and manufacturing options in order to lessen the dependency. It can go for its own manufacturing units in home country. 9) Make a strong online as well as retail store presence. 10) Participate in social activities and responsibilities to improve and enhance brand image.34 | P a g e
  35. 35. 11. Now position yourself as the strategist for the firm’s competitor, how will be your strategy look like i.e. how can you neutralize or outcompete it (the recommendation mentioned in question 7). Read Grant Figure 4.2. Page 106 (20 points)?Adidas is the chief rival of NIKE. The A framework for Adidas’s analysis is as follows: Objectives The key objective is to become the leading sports brand in the world by reinforcing its position as an innovator Predictions and technologically savvy marketer in Adidas will focus more on the sportswear industry i.e. leading through product differentiation strategy innovation. just like NIKE, to improve its product quality and enhance its product line. Since women Strategy athletes is a fast growing segment, The business strategy is product Adidas can also focus on this differentiation with a diverse brand strategy. portfolio, expansion i.e. investments Adidas in competing fiercely with focused on highest-potential markets NIKE globally. It has been and channels. competing on price and technology with others. But consumers have become more knowledgeable and look for Assumptions innovation and variety. To capitalize on this reality, adidas The sportswear industry is at the will focus on NIKE’s business maturity stage of the product life cycle. strategy and create a The market is basically experiencing a differentiated product experience slowdown in sales growth because the at competitive price that are better products have achieved acceptance by tailored to specific consumers. their most potential buyers. Adidas will focus on its cost structure to minimize cost. Adidas will focus more on the retail presence to give NIKE a Resources & Capabilities hard time. Technological capability Adidas might focus on sponsoring Customer focus upcoming sporty events. Brand Recognition Supply chain management Effective Marketing capability Strong distribution capability35 | P a g e
  36. 36. The other strategic recommendations for the competitor will be as follows:- 1) Target the emerging economies of the world e.g. Latin America, East Europe and Asia, where NIKE is trying to expand and deepen its root. 2) Strategic and financial planning to become more cost-efficient than NIKE. 3) Strengthen the cash management, which is NIKE’s weakness. 4) Promote the female athletes and sponsor more women sports events. 5) Focus on product innovation which will give a technological advantage over NIKE. 6) Focus on the right strategic acquisitions areas were where NIKE is trying to make a significant presence like training and fitness clubs. 7) Focus on the price sensitive segment of customers like college and school students. 8) Employ specialists to strengthen the brand image through advertising, and social activity. 9) Improve working conditions in company to be more sought after than NIKE. This will ensure we get the best talent in the industry. 10) Open more retail stores, as NIKE has less retail store presence. 11) Research the international market to find out the latest trend in kids and women apparel products. 12) Enhance adidas online market more than NIKE. 13) Offer product with high quality like NIKE.36 | P a g e
  37. 37. 12. According to the DCF (discounted cash flows) paradigm, value drivers of a firm are such as sales growth, operating profit margin, and cash tax rate, proportion of net working capital to sales, proportion of fixed assets to sales, and proportion of other long term assets to sales. These value drivers can be used to estimate a firm’s future free cash flows (ultimately the firm’s value). Based on your analysis above (Q1-Q11) propose a strategic plan that can improve the firm’s future free cash flows (i.e. by improving its value drivers). Read file FCF drivers.doc in your Blackboard vista. Website might help. Identify which value drivers that can be improved and justify. Calculate the potential value creation of your proposed strategic plan. Assume that the firm has certain competitive advantage period and the residual value is the firm’s book value. For example, competitive advantage period of 4 year suggests that there won’t be any economic profit created after year four. Thus, the residual value is the perpetuity value of the firm’s book value at year four and discounted at t = 4. Make your own assumption as necessary. (20) Value Drivers Historical Proportion New Business strategy Sales growth 5% 5% Operating profit margin 10.03% 10.03% Cash tax rate 24.2% 24.2% Net working capital/sales 24.24% 24.24% Fixed assets/ sales 13.60% 13.60% Other long term assets/ sales 5 5 Cost of capital 8.9% 7.0% Competitive advantage 2 2 periodThe value driver that is changed is the cost of capital. Let’s assume that the new businessstrategy will change the cost of capital Wacc to 7.9%. The value of all the other drivers remainsthe same. The historical values refer to the values of the FCF drivers in year 2010.From the table below,The value of the firm with the old business strategy was $641700.54 millionThe value of the firm with the new business strategy is $1563201.00 millionValue of Firm new - Value of Firm2010 = 921500.46Thus decreasing the cost of capital by approximately 1% increases the value creation by921500.46 million. If other value drivers are also improved at the same time, the value of thefirm can be improved and enhanced to a great extent.37 | P a g e
  38. 38. Calculations FCF 2010 $2,045.31 WACC 8.90% WACCnew 7.00% g 5% HV1 FCF2010(1+g)/WACC- g ) HV1 55066.0385 Value of Firm2010 (FCF2010+ HV1)/WACC Value of Firm2010 641700.54 HV2 FCF2010(1+g)/(WACCnew –g ) HV2 107378.78 Value of Firm new (FCF2010+ HV2)/WACCnew Value of Firm new 1563201.00* HV – Horizon Value38 | P a g e
  39. 39. 13. Bonus question (optional): Use line graph to show the development of the elements of ROCE of the firm and its competitor (5 points). The line graphs show the development of the elements of ROCE of NIKE and Adidas from 2006-2009 COGS % 60 50 40 30 20 Nike 10 Adidas 0 2006 2007 2008 2009 Year SG&A% Profile 50 40 SG&A% 30 20 Nike 10 Adidas 0 2006 2007 2008 2009 Year ROCE Profile 25.00% 20.00% 15.00% 10.00% Nike 5.00% Adidas 0.00% 2006 2007 2008 2009 Year39 | P a g e
  40. 40. Depreciation Profile 3.5 3 Depreciation% 2.5 2 1.5 Nike 1 Adidas 0.5 0 2006 2007 2008 2009 Year Invetory turnover ratios 10 Inventory turnover 8 6 4 Nike 2 Adidas 0 2006 2007 2008 2009 year Net Margin profile 12 10 Net margin 8 6 4 Nike 2 Adidas 0 2006 2007 2008 2009 Year40 | P a g e
  41. 41. A/R turnover Profile 10 8 A/R Turnover 6 4 Nike 2 Adidas 0 2006 2007 2008 2009 Year Asset Turnover ratio profile 1.6 Asset turnover ratio 1.4 1.2 1 0.8 0.6 Nike 0.4 Adidas 0.2 0 2006 2007 2008 2009 Year Cash Turnover profile 25 Cash Turnover 20 15 10 Nike 5 Adidas 0 2006 2007 2008 2009 Year41 | P a g e