Hitting The Wall Nike And International Labor Practices


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Hitting The Wall Nike And International Labor Practices

  1. 1. By Ngoie Joel Nshisso<br />International Business<br />Ph.D. program<br />Northcentral University<br />December 2010<br />Hitting the Wall: Nike and International Labor Practices<br />Company overview<br />Just like McDonald with its most recognized hamburger - a flat patty of ground meat, usually beef, that is broiled, grilled, or fried and usually served in a bun- is a symbol of American pride all around the world, Nike with its footwear, apparel and all other sport product embodied of swoosh logo is a symbol of American business success in sport, athletic and fashion industry. The company history recall that<br />The Nike athletic machine began as a small distributing outfit located in the trunk of Phil Knight's car. From these rather inauspicious beginnings, Knight's brainchild grew to become the shoe and athletic company that would come to define many aspects of popular culture and myriad varieties of 'cool.' Nike emanated from two sources: Bill Bowerman's quest for lighter, more durable racing shoes for his Oregon runners, and Knight's search for a way to make a living without having to give up his love of athletics.<br />In 1963, Phil Knight traveled to Japan on a world-tour where he met with a Japanese running shoe manufacturer, Tiger--a subsidiary of the Onitsuka Company, presenting himself as the representative of an American distributor interested in selling Tiger shoes to American runners. The Tiger executives liked what they heard and Knight placed his first order for Tigers soon thereafter. By 1964, Knight had sold $8,000 worth of Tigers and placed an order for more and ended up hiring a full-time salesman, Jeff Johnson. After cresting $1 million in sales and riding the wave of the success, Knight devised the Nike name and trademark Swoosh in 1971 and went from $10 million to $270 million in sales. Beside the swoosh logo, Nike was also personified by its motto: just do it (Nike 2010, para 1).<br />Company business strategies <br />To be competitive, low price seller and maximize profit, Nike had to find a way to keep its labor cost as low as possible. The company adopted a strategy that will take advantage of the new trend offered to many multinational enterprises by trade agreement, technology and communication sweeping developed and developing countries alike by outsourcing production to low labor cost countries. As noted by Christopher, Sumantra, and Paul (2008), “the company would shave costs by outsourcing all manufacturing and has all products made by independent contacting factories” (p. 102). Another strategy which is a logical consequence of the above mentioned was that Nike chose not to have “physical assets” (Christopher, Sumantra, & Paul 2008, p. 102).<br />Before to look at how outsourcing ruined the company reputation and operations, the next section will explain the outsourcing concept and look at its advantages and disadvantages.<br />Definition, advantages and disadvantages of outsourcing<br />Definition of outsourcing <br />In its early beginning, outsourcing is a business strategy by which a company is “purchasing from someone else a product or service that had been previously provided internally” (Wheelen & Hunger 2008, p.198). In general, products manufactured in repetition and routine sequence are outsourced within the country or overseas.<br />Advantages of outsourcing<br />By the end of the twentieth century, the world was becoming a global village, term coined by Levitt who noticed that “the world’s needs and desires have been irrevocably homogenized with the commonalty of preference leading to standardization of products, manufacturing and institution of trade and commerce”( Christopher, Sumantra & Paul 2008, p. 91). The birth of internet will add to this trend quick, cheap and variable means of communication, video conference able to establish live-conversation between persons at distant miles away and finally electronic mail will help transmit large volume of data and information that previously could have been done only by regular letter sent by express mail. <br />As the world globalizes, less government regulations and trade agreements between nations will start to dominate the trading environment and they will be enforced international bodies. The mostly named is the World Trade Organization for which Tomas (2009) gives the following brief explanation:<br />Since 1995, the world trade organization has overseen the global rules of government policy toward international trade and provided the forum for negotiating global agreements to improve these rules. The WTO subsumed and expanded on the General Agreement on Tariffs and Trade (GATT). The WTO (like the GATT before it) espouses three major principles: (1) liberalization of trade; (2) nondiscrimination, or the most-favored nations (MFN) principle; and (3) no unfair encouragement for exports (p. 168).<br /> The above advantages laid a way to outsourcing by companies in developed to developing countries. The destinations of choice were “Eastern Europe, Asia and Africa” (Schaffer, Agusti & Earle 2009, p. 30-31) for a clear reason admits Thomas (2009) <br />Poor workers in poor countries: many of the world’s people are very poor. Many work in the informal sector, scratching out an existence. Even those who have employment for pay often receive wages that are very low in comparison to wages in the United States, Western Europe, and Japan (p. 3-4). <br />Some poor countries have even gone too far by using under age children and slaves in the workforce to perpetuate a low wage policy. A study initiated by the United States made an astonishing discovery in Africa and reported that: <br />Child labor and slavery are used in this part of the globe for economic reasons because they provide free or cheap labor in the demanding work of oil drilling and mining for which statistics show that “Oil imports (crude and non-crude) continued to dominate imports from Sub-Saharan Africa with $71.2 billion in oil imports in 2008, accounting for 82.8 percent of all U.S. purchases” (U.S.-Africa trade profile 2009, p 13).<br />Advantages of outsourcing<br />Saving on wages lures company with intensive labor cost to choose countries with low wages as the best place to outsource part or all operations and if a location grew richer with rising cost, the delocalization would be an inevitable decision. Nike gives a perfect illustration of the practice according to Christopher, Sumantra and Paul (2008). They recall that<br />Nike signed its first contacts with Japanese manufacturers but eventually shifted its supply base to firms in South Korea and Taiwan. As these bases grew richer, costs rose, Nike began to urge its suppliers to move their operations to lower cost regions. To remain in the company’s good graces, most manufacturers rapidly complied, moving their plants to China and Indonesia (p.103). <br />The practices of chasing low wages suppliers in developing countries seemed to pay huge dividends to Nike. Indications from Christopher, Sumantra and Paul (2008) shows that the company’s gross margin remained largely above “37% from 1989 to 1999” (p. 110), with a markup of 50% per shoe from factory price to Nike. Labor cost per shoe in 1999 was only “$ 3.37” (p. 111) representing 0.76% of the profit made by Nike.<br />Disadvantages of outsourcing <br />Riding the waves of outsourcing is not free of risks. Wheelen and Hunger (2008) published a study of efforts conducted by European and North American firms that lists these seven major outsourcing errors or risks:<br />Outsourcing activities that should not be outsourced: companies failed to keep core activities in-house.<br />Selecting the wrong vender: vendors were not trustworthy or lacked state-of-the-art processes,<br />Writing a poor contact: companies failed to establish a balance of power in the relationship.<br />Overlooking personnel issues: employees lost commitment to the firm.<br />Losing control over the outsourced activity: qualified managers failed to manage the outsourced activity.<br />Overlooking the hidden costs of outsourcing: transaction costs overwhelmed other savings.<br />Failing to plan an exit strategy: companies failed to build reversibility clauses into their contacts (p. 199).<br />Problem that affected Nike <br />One of the problems that affected Nike is a lack of qualified managers that failed to understand, manage outsourcing regulations and deals with communication when critics started. Nike seemed not to have an international marketing and communication manager whose job description would be “to develop market strategies and plan, to capture marketing insights, to connect with customers, to build strong brands, to shape the market offerings, to deliver values, to communicate value and to create long-term growth” (Philip & Kevin 2006 p. 29-30). These responsibilities lead to marketing audit before and during outsourcing operations. <br />In fact, Christopher, Sumantra and Paul (2008) revealed that it was only when the company found itself in the hot seat because gross violations “it hired Dusty Kidd in the public relations department to draft a series of regulations for its contractors” (p.105) and Andrew Young, the respected civil rights leader and former mayor of Atlanta, to conduct an independent evaluation of its code of conduct” (p.107), also “arranged for students at Dartmouth’s Amos Truck School of business to conduct a survey on the suitability of wages and benefits paid in its Vietnamese and Indonesian contract factory workers”(p. 108). Unfortunately, it was too little and too late. <br />Key issues impacting the problem<br />Not having at the executive level managers to develop global marketing and communication strategies created many issues within the company. The present study will focus only on corporate culture and ethics.<br />Corporate culture<br />One good definition of corporate culture comes from Wheelen and Hunger (2008) who said:<br />Corporate culture is the collection of beliefs, expectations, and values learned and shared by a corporation‘s members and transmitted from one generation of employees to another. The corporate culture generally reflects the values of the founder(s) and the mission of the firm. It gives a company a sense of identity. Corporate culture shapes the behavior of people in a corporation. Because these cultures have a powerful influence on the behavior of people at all levels, they can strongly affect a corporation’s ability to shift its strategic direction (Christopher, Sumantra & Paul 2008, p. 116).<br />Nike, like any other corporations in business was very interested on profits but at the very high level of the company, a destructive culture of non interest on working conditions, no respect to safety and health standards, no regard for the environment, corruption and intimidations was one of its beliefs. When critics mounted about low wages, coerced overtime and work safety in plants under Nike contracts, the company response was: “labor conditions in its contactors’ factories were not – could not – be Nike’s responsibility” (p.104).<br /> <br />Problem of ethics<br />In the philosophy of Knight’s original plan probably rested ethical problems: “not only would Nike outsource, but it would outsource specifically to low cost parts of the world,” (Christopher, Sumantra & Paul 2008, p. 116) was a statement that will preside to the company’s attitude of ignoring any problem requiring amelioration of working conditions. <br />Corporate America knows that there is “the fair labor standards act of 1938 that prohibit child labor, limits working hours and establishes working safety conditions” (U.S. Department of labor 2010, p. 1-54). Multinational enterprises choosing to outsource know also that since “1970, the United Nations, the trade organizations and private organizations have laid out regulations against worker exploitations, child and slave labor” (Schaffer, Agusti & Earle 2009, p. 72-73). Deliberately, Nike chose to walk-away from them. To make matter worse, it threatened its foreign contractors to move business somewhere if they don’t keep wages down and also kept blind eye to “bribery” of public officials (Christopher, Sumantra & Paul 2008 p.103). At this point, Nike bears responsibility for actions of its partners because <br />Ethical or unethical behavior is not entirely a matter of the character of individual employees; it is determined at least in part by factors in the organization. People are influenced by the forces surrounding them: their peers, their superiors, the reward system, group norms, and organization policies and values (Cynthia, Lyle, & James, p. 22).<br />Alternative solutions<br />Nike and its CEO Knight were weaken by the scandal but did not lose spirit. They have learn not to be stubborn anymore but to comply, to change, to improve, to regain leadership in sport and apparel business under swoosh’s logo. In the search for solutions to their failure, they run for external marketing audit. This part of marketing audit is important but presents itself as a second opinion that confirms or corrects the internal audit. In essence, what is global marketing audit and what are its components? The next section attempts to respond to these questions. <br />Global marketing audit<br />Outsourcing is now days a major task to undertake. Because of it advantages and disadvantages, developed and developing countries with assistance of bodies like United Nations, activists and scientists are coming together to regulate competition, working conditions, environment and more. Companies that decide to outsource need to do their homework in order to learn external forces that will impact operations and define internal strategies to be competitive. The task that can help gather external and internal data is global marketing audit. this managerial function need to be performed before and during all the period of outsourcing. According to Warren (2002) global marketing audit is<br />A comprehensive, systematic, and periodic examination of a company’s or business unit’s marketing environment, objectives, strategies, programs, policies, and activities, which is conducted with the objective of identifying existing and potential problems and opportunities and recommending a plan of action to improve a company’s marketing performance. The global marketing audit is a tool for evaluating and improving a company’s global marketing operations. The audit is an effort to assess effectiveness and efficiency of marketing strategies, practices, policies, and procedures vis-à-vis the firm’s opportunities, objectives, and resources. Its components are 1) marketing environment audit, 2) marketing strategy audit, 3) marketing organization audit, 4) marketing systems audit, 5) marketing productivity audit, and 6) marketing function audit (p. 525-527). <br />If Nike performed marketing audit to learn or know existing national and international regulations, the role of not for profit organizations to defend human rights and environment, and the lawlessness of some developing countries, it could avoid its misfortune. <br />Recommendations and Conclusion<br />Nike case illustrates decisions of a company acting to remedy the problem of negative criticism in a legally protected and defended global village where company’s social responsibility can no longer go unnoticed or uncensored. As many structured entities (companies, governments, international organizations, and activists) enter multinational arena and the public become more aware of social and environmental conditions in developing countries, the need for sufficient, honest disclosure of corporate conduct will continually increase and put pressure on companies practices. <br />Nike started working on its culture to turn things around but the damage was so severe that it need to keep working to buy in the idea of full disclosure of social responsibility practices, using internal and external audit to show to consumers, competitors and the world that it is carrying along with them the trend of making social responsibility a priority in production, finance and purchase decisions. As advised by Philip and Kevin (2006) for whatever Nike will plan to do for its success, “adapting and conducting business practices that protect the environment and human” (p.22) will avoid him to be its own enemy and will provide him tools to defend against detractors. <br />References<br />Christopher, B., Sumantra, G., & Paul, B. (2008). Transnational management: text, cases, and readings in cross-border management. New-York, NY. McGraw-Hill Irwin<br />Cynthia, D. F., Lyle, F. S., & James, B. S. (2006). Advanced human resource management. Boston, MA <br />Edward, B., (2005). The Bhopal disaster and its aftermath: a review. Retrieved from http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1142333/ <br />Nike. (2010). Company overview. Retrieved from http://www.nikebiz.com/company_overview/<br />Philip, K., & Kevin, L. (2006). Marketing management. Upper Saddle River, NJ. Prentice Hall <br />Schaffer, R., Agusti, F., & Earle, B. (2009). International business law and its environment. South-Western Cengage Learning. Mason OH<br />Thomas, A., P. (2009). International economics. The McGraw-hill Irwin N.Y. New York<br />U.S. Department of labor. (2010). The fair labor standards act of 1938.Retrieved from http://www.lawupdates.com/pdf/resources/employment/Fair_Labor_Standards_Act_of_1938,_as_amended.pdf <br />U.S. Department of commerce. (2009). U.S.-Africa trade profile 2009. Washington, DC: Author<br />Warren, J.K. (2002). Global marketing management. Upper Saddle River, NJ. Prentice Hall<br />Wheelen, T. L., & Hunger, D. J. (2008). Strategic management and business policy (11th ed.). Upper saddle river, New Jersey 07458: Pearson education, Inc. (Original work published 2000)<br />