Nike

Nike: Business Proposal Frank Mattair ECO/561 11 March, 2013 Alfred Igbodipe Nike: Business Proposal Founded in the 1950s out of the simple frustration in finding a running shoe that would give Coach Bill Bowerman’s University of Oregon’s track and field runners a competitive edge, Bowerman decided to start making the shoes himself. After partnering with one of his runners, Phil Knight, the two of them went on to found Nike in 1972 (Nike, 2013).  Although the 1970s saw growth and demand for Nike products, they saw their position as an industry leader drop in the early 1980s. They had dropped the ball and missed the explosion of the aerobics fad and were in desperate need of celebrity endorsements to increase sales revenue (Nike, 2013). The 1980s ushered in Nike’s new slogan “Just Do It,” and it seemed as though sports celebrities were flocking to Nike after the creation of the signature Air Jordan brand. Nike has come far since their track and field days and is currently signing celebrities from across the sports spectrum. Tiger Woods, Bo Jackson, and Lance Armstrong are among their most popular celebrities and their endorsements have been critical to the success and recognition of the Nike brand (Nike,2013).  Supply & Demand Analysis During Nike’s first fiscal quarter of 2010, NASDAQ reported that orders were up 10% over the same period the prior year. Management noted rising demand, with the exception of Japan and Western Europe (Google Finance, 2013).  Whereas demand dropped slightly in the fiscal second quarter of 2010, worldwide orders of Nike products still grew 9% over the previous quarter. Analysts reported that better than expected retail numbers showed demand increasing in China, Western Europe, and the United States (Cheng, 2010). Both of the earning reports and market analysis indicated that Nike was going to have a strong year and demand would increase throughout the year. However, in December 2010, both demand for Nike products fell as production costs increased. Nike CEO Mark Parker explained that, “Near term, there are some continuing macroeconomic challenges. As supply and demand find a new normal in the recovering economy, our industry is going to experience margin pressure due to rising input costs” (Cheng, 2010). These reports negatively affected growth estimates and stock value for Nike, and had an adverse effect two of its main retailers, Foot Locker, and Finish Line. Concerns about rising inventory levels and decreased demand caused both retailers stocks to drop slightly (Cheng, 2010).  In a review of Nike’s 2012 Annual Statement, revenues for the company were down 1% from the prior year. Nike also indicated that their inventory supply was down 13% from 2011 (Nike, 2013). This is an indication that Nike needed to reduce supply to come in line with the decreased demand. Elasticity Analysis According to an analysis of Nike by Cheng, “…consumers of Nike-Adidas sports gear are relatively inelastic to price since that expenditure forms a small part of their total expenditure. The demand curve in such a market is kinked and so is inelastic to price decreases; firms don’t gain a substantial number of customers by reducing prices.” In addition to this Nike has a product with no competition the Air Jordan. Since the launch of the line, the Air Jordan brand has dominated the market and demand has remained high. Collectors of Jordan’s often pay hundreds of dollars for the newest releases and retailers often have “Sneaker heads” spending the night outside their doors for a chance to purchase the latest pair ( US Athletic, 2011). This type of demand is, perfectly inelastic. Devoted consumers are willing to pay any amount of money to add just one more pair to their ever-growing collections. Research indicates that Nike’s price changes are inelastic; the failing economy had an effect on the demand of Nike’s products. Both revenues and inventory are down, indicating that Nike has responding to the slight decrease in demand by reducing supply (Wright Report, 2011). Costs & Productivity Analysis With a 47% market share of the domestic footwear industry, the overseas production of Nike’s product has fallen under scrutiny (Holmes, Stanley, Bernstein, 2010). As production costs increased Nike began outsourcing production to Thailand, Malaysia, and the Philippines’. China became the top manufacturer in 1981 and held that position until 2010, when Vietnam took over, as outlined in figure 1. Figure 1: Outsourcing percentages (Holmes, Stanley, Bernstein, 2010). The decision to outsource production overseas has come with harsh criticism. The factory employees are not employees of Nike, but employees of the subcontracted companies. The factories have faced violations over the years that include human rights issues and deplorable factory conditions. In a study commissioned by Nike, of the 569 (producing of their products) factories it contracts with, labor code violations have been found in each factory (Holmes, Stanley, Bernstein, 2010). Nike has been responsive to critics of its manufacturing process. According to their website, it is Nike’s goal to inspect the factories at least once per year. Of the 659 factories, 22 were found in 2011 to have major violations. However, 172 of the facilities, which constitute 26% of their contracted factories, had never been inspected in 2011 (Nike,2013).  To be competitive, Nike Inc. must keep labor costs below 24%. Factories that manufacture Nikes products cannot afford to pay higher salaries because Nike will take their business to countries that can produce at a lower cost. Due to this competition overseas factory owners slash their own profits in order to keep the contracts. A recent analysis of Nike’s profit on a pair of shoes shows that a pair of shoes retailing for $140. Figure 2 shows a breakdown in the cost of production at Nikes Vietnam factory in 2011. Figure 3 shows the cost of Nike Inc. profit on a pair of show in the United States. Figure 2: Costs and Profit Vietnam Factory 2011 (Holmes, Stanley, Bernstein, 2010). Figure 3: Cost and Profit United States Factory 2011 (Holmes, Stanley, Bernstein, 2010). Market Structure Analysis The Sporting Goods Intelligence website lists 40 major athletic shoe companies, with additional smaller companies vying for their piece of the footwear industry (Wright Report, 2011), from Adidas to Nike; buyers have many choices when buying a new pair of sneakers. While all of these companies sell similar products, each has worked hard to differentiate their products from each other. This is an example of Monopolistic Competition.  As discussed in the Market Supply, Demand, and Elasticity sections, Nike has been partnered with Michael Jordan since 1985 to develop and sell his signature line of shoes. For nearly 30 years this footwear line has dominated the industry. In 1980 they held 50% of the market share; in 2011 it was a staggering 95% (Holmes, Stanley, Bernstein, 2010).  Due to the uniqueness of their product, Nike could set their pricing with little regard to the rest of the athletic footwear industry. When the original Air Jordan was released in 1985, it retailed at $65 – which, at the time, was the most expensive basketball shoe on the market (Air Jordan Shoe). Currently Air Jordan’s are selling as a “retro” line for a retail price of $100 (Holmes, Stanley, Bernstein, 2010). Over the years, the line has only become more popular. In 2011, 1,000 Jordan fans overwhelmed a local mall when they lined up at midnight to purchase a pair of Space Jam sneakers priced at $175 (Air Jordan Sneaker). The hype continued on eBay, where a single pair of original Air Jordan’s was recently listed at $4,999.99 (Google Finance, 2013). Clearly, Nike has found a way to command the market share and created a product that truly differentiates itself from the competition.  Prices and profits of many of Nike’s footwear lines have risen since 1995; however Nikes costs have stayed relatively the same.  Microeconomic Principles A microeconomic law states that all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa. This is the Law of Demand. Every company has to go through some sort of inverse relationship just as this. The equilibrium price and quantity at Nike Inc. is very important to their sales. The equilibrium price is at 10 whereas the quantity is at 15. There are also chances in which the prices are constant and the other variable of the prices vary. When their supply increases with the increase in price, the supply curve shifts to the right. Then prices are forced to decrease due to pressure on the quantity supplied without a fair increase in demand. Then again, if the demanded quantity increases without a decrease in price, the prices will be forced to rise.              Another microeconomic law states that all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by supplier’s increases and vice versa. This is the Law of Supply, and it means that when the prices increase, the willingness of the supplier to supply increases also. For example, Nike definitely uses the law of supply and demand in marketing their Air Jordan’s. Resellers boost the sale, which in turn boosts the demand, which in turn boosts the supply. Michael Jordon only produces a certain amount of Air Jordan’s a year, and this amount is very scarce. This means that the prices for them increase.             The change in demand and/or supply becomes microeconomic relationship market demand, which is the level of individual demands in the market for a product: the level of desire for all people in the market for the product. Demands from the United States, which have improved over a course in time, were of products such as apparel and running gear. The United States holds the largest percentage of purchased Nike apparel with the highest demand items coming from their Pro Combat gear. Nike is known for its worldwide advertising and by this advertising has created an increase in market demands for fashionable athletic footwear and apparel.             Currently Nike is at market equilibrium because their supply equals consumer demands, and both are at an agreeable price between buyers and sellers. Because Nike is such a high priced brand, it is most likely to undergo a supply demand.             This brings us to microeconomics relationship utility. This relationship shows how they protect the Nike brand. The relationship utility is defined as the amount of satisfaction received from consuming a product or service. If the product has been around since 1972 and with technology advancement, speaks for itself that Nike has the customer satisfaction needed.             Essential relationship Scarcity pinpoints that Nike has limited resources. This can be looked at in a way that there are limited resources in the face of unlimited wants. Not saying that Nike has limited resources but customers who want the best quality sometimes cannot afford the price. It is crucial at points in time when there are wants that cannot be met. Macroeconomic Principles   Some factors that may affect the Gross Domestic Product (GDP) of Nike are their activities over a period. Determining the relative value of an amount of money in one- year compared to another is more complicated than it seems at first. There is no single "correct" measure, and economic historians used one or more different indicators, depending on the context of the question. Indices are measured as the price of a "bundle" of goods and services that a representative group buys or earns. Over time the bundle changes; for example, carriages have been replaced by automobiles, and new goods and services have been created in the apparel and sneaker industry.             The GDP is the product of final goods and services produced with factors of production in a given period within a country’s border. GNP is the market value of final goods and services produced in a given time period by a country’s citizens. Whether or not they were produced inside the country. Gross domestic product =consumption. Micro level organizational performance in general and business level performance in particular is difficult to improve in business in view of the Nike’s macroeconomic performance. While external factors do influence organizational and business performance, it is the cumulative impact of micro-level organizational and business performance that also feeds into the macro level performance. Due to this intertwined relationship, all responsibility for dismal micro level performance cannot be assigned to the macro economy. For, the macro economy too will be as weak or as strong as its micro constituents are. So, while the macro economy does require sound management, the micro constituents should to be managed according to the modern principles of management that include anticipation and a response to external factors in general and economic factors in particular as an essential component of organizational management. References Cheng, Andria. "Greater Customer Demand Sends Nike to New High - MarketWatch." MarketWatch - Stock Market Quotes, Business News, Financial News. Retrieved from http://www.marketwatch.com/story/nike-jumps-after-results-promise- continued-demand-2010-03-18. Forbes. (2012, April). Nike financial applications. Retrieved from http://finapps.forbes.com/finapps/statements/info Google Finance (2013, Feb 18). Retrieved from http://www.google.com/finance# Holmes, Stanley, and Aaron Bernstein. "The New Nike." BusinessWeek - Business News, Stock Market & Financial Advice. Retrieved From http://www.businessweek.com/magazine/content/04_38/b3900001_mz001.htm US Athletic Retail Market Report, 2011 Edition. (2011, Fall). Retrieved from http://www.prolog.org/10333892-us-athletic-retail-report-by-koncept-analytics.pdr Wright Report: Nike Inc. Company Profile. (2011, Fall). Retrieved from http://http://wrightreports.ecnext.com/comsites/bin/comsite5pl'