Nike’s International Strategy

Nike World Headquarters in Beaverton, Oregon

Nike is the world’s leading athletic textile company and its international strategies are a big reason why.  For the most part, Nike’s product offerings are the same around the globe in what they are, their price and quality, and in reputation within their markets.  Even the primary Nike marketing slogan “Just Do It” and the logo “Swoosh” are synonymous and ingrained into the public’s collective mindset with everything Nike produces worldwide.  Essentially the end-product in America is the same in India, China, Brazil, wherever Nike are sold. 

Where Nike exploits their real international economies of scope is in gaining access to low-cost factors of production and in gaining access to new customers for their existing products.  Utilizing a centralized hub approach where almost all pertinent strategic decisions are made at the world headquarters in Beaverton, Oregon and only a select few manufacturing/operational decisions are made locally is how Nike pursues these efforts internationally. 

As noted previously, Nike does not make a single shoe itself, but rather outsources all of these processes around the globe implementing a strategy of cost reduction due to the lowest possible costs in the creation of its products.  Once made in these strategically placed international partner firms, the company then ships out the product to the closest market that Nike resides, hence implementing an international integration of this economy of scale and an even greater reduction along the value chain.

Also Nike employs thorough market analysis of emerging areas for its products as well.  Researching the world over has allowed Nike’s global sales to outpace its domestic levels every year since 2003, largely in part to its accessing the emerging markets of China, Russia, and Turkey.  Since its product line is virtually unchanged, Nike only rarely exploits internationalization within product life cycles.  However it can keep this potential competitive advantage in its back pocket to manage uncertain times or market reactions.

Nike's Merger and Acquisition Strategies

Being a company that is continually seeking out sources of competitive advantages, Nike has historically implored merger and acquisition strategies when the proper alliances present themselves.  The main reason Nike implements these plans is to ultimately create economic value in its exploitation of the competitive opportunities that a target firm creates for the company, which in turn increase the economic profits for its shareholders.  Nike also implements this strategy to gain market power in product markets and to take advantage of the potential above-normal profits a merger and acquisition can create.

In its existence, Nike has acquired only targets that are strategically related to its existing markets further diversifying their economies across a wider breadth of product offerings.  Predominantly venturing into product extension and horizontal mergers to do so.  Nike's first acquisition was in 1988 when it acquired Cole Haan that gave the company access into the upscale footwear market.  In 1994, Nike acquired hockey product giant Bauer, but subsequently sold this subsidiary in 2008.  Nike then waited almost a decade before its next acquisition which was surf apparel firm Hurley International in February 2002.  However in the 2000s, Nike (like many U.S. companies during this time) was very active in its acquisition projects.  In July 2003, Nike horizontally acquired former basketball shoe competitor Converse and its established Chuck Taylor All Stars sneakers.  In August 2004, Nike leapt into horizontal acquisitions again with the purchase of Starter, but turned around and sold it in 2008, the same year as Bauer.  2008 was not all about downsizing for Nike though, as in the March of that year Nike acquired soccer apparel titan Umbro.  

Currently, Nike owns four key subsidiaries (Cole Haan, Hurley, Converse, and Umbro) but I would not be surprised if Nike continues expanding on their merger and acquisition/diversification strategy.  With reported free cash flows increasing substantially over the past decade (from $575.5 million in 2001 to $4.5 billion in 2011: an appreciation of about 680%), Nike has an awful lot of reserves at its disposal for future merger and acquisition plans.

Nike's Strategic Alliances

A big part of Nike's corporate strategy is their alignment with outside agencies in cooperating to develop, manufacture, and sale their products.  This practice is known as strategic alliances.  There are three categories of strategic alliances - nonequity alliances, equity alliances, and joint ventures - and Nike implements them all.

Most notably, Nike has entered into a nonequity alliance with Apple to meld sports with music and thus created the "Nike+ iPod" line of products.  Both companies utilize their areas of expertise and popularity to capture new markets and industries.  They share their unique resources and capabilities to create a cooperative competitive advantage that capitalizes on their differences in an innovative and profitable way.  Examples of this partnership can be seen with the Nike+iPod Sport Kit that wirelessly connects a removable "chip" in a person's Nike shoes with their iPod to allow a them to track their pace and workout audibly through the music player while working out.  Another example of Nike reaching into the technological realm is their partnership with Dutch-satellite navigation company TomTom and their creation of a line of GPS-enabled sports watches, Nike+ SportWatch GPS.

Nike also has many equity alliances with overseas partners, in particularly within their product design, distribution, manufacturing, and marketing processes.  Nike is a large global supplier of athletic textiles and outsources much of their supply chain as a result.  To that extent, Nike uses partners abroad to afford lower-cost entry into new, emerging markets, to manage new marketplaces and their uncertainties, and afford them the flexibility to exit declining markets as they see fit.  Nike coordinates efforts with these firms to appease local tastes (for example in Hong Kong, Malaysia, and Yugoslavia), use advanced production technologies (in Japan, Taiwan, and South Korea), and take advantage of lower cost suppliers (China, Philippines, and Thailand).  Most of these areas have strict governmental regulations toward foreign companies, so these partnerships are vital to Nike's global successes.

Aligning with another firm to create a totally new entity, a joint venture, is an area Nike has been a part of before too.  An example is Nike's joint venture with Royal Philips Electronics (the largest European maker of consumer electronics) to create the aptly named entity "Nike-Philips".  Combining both of their skills and abilities in a single firm, Nike-Philips creates "compact, lightweight, stylish MP3, FM, and CD players that leave you free to jump and run while listening to great tunes".  Both firms benefit from the agreement as Nike entered into new markets whereas Philips established a American connection for its products.

Implementing Nike's Corporate Diversification

Magazine Cover of Nike President and CEO Mark Parker

Being a global conglomerate that's highly diversified in the athletic textile markets, Nike must be agile within their corporate governance to best exploit their separate divisions with their shared economies of scope.  Plus being a Fortune 500 company whose stock is traded in great volume, they must be leery of not only focusing on internal success but to appease outside equity holders who want to benefit from their capital investment by maximizing the current and future present value of Nike's cash flows. 

Nike does this like many other diversified firms with a multidivisional organizational structure, or M-form.  Nike has a diverse and esteemed Board of Directors, Nike's "creator" as its Senior Executive, a knowledgeable and experienced Corporate Staff, and is broken down divisionally across its many brands and further specialized by function and geographic specialties.

At the top, Nike's Board of Directors consists of twelve individuals but only two of which are internal managers: Chairman of the Board and Founder of Nike, Philip Knight, and President and Chief Executive Officer of Nike, Mark Parker.  The other ten individuals reflect Nike's goal of placating their outside equity holders' initiatives with highly regarded members from outside of the firm.  These Nike "ten" are comprised of senior executives (from companies such as GE, Microsoft, Apple, FedEx, Lilly, TV One, and Starbucks), intellectuals (a senior counselor and partner of a acclaimed Oregon law firm and the VP/Chancellor of the University of Illinois), and even a Hall of Fame college basketball coach (from Georgetown University).  From there the Board is organized into subcontinental: audit, compensation, corporate responsibility, executive, finance, and nominating and corporate governance.

The success of Nike's diversification is through the monitoring and prescribed bonding activities of this group.  By looking at Nike's growing global market shares and the continual increases in economic value added every year (Dzombak, 2011), Nike's organizational structure from the top down is doing just that.


Reference:

Dzombak, Dan. "Nike's Management Is Creating Value." Fool.com. The Motley Fool, 11 Feb. 2011. Web. 05 Apr. 2012. <http://www.fool.com/investing/small-cap/2011/02/11/nikes-management-is-creating-value.aspx>.

Nike's Diversification Strategy

Nike is definitely a diversified company.  Their product offerings encompass virtually any sports' needs in apparel, equipment, and shoes.  Be it baseball or badminton, Nike has all the bases covered.  


Not only is Nike's product mix diversified, their actual total product offerings come from many other clothing-related linked firms that provide valuable economies of scope to exploit in the market.  Companies such as Cole Haan (a luxury brand that provides high-quality men's and women's clothing and accessories) and Hurley (a youth lifestyle brand that provides clothing and accessories geared to the surfing and skateboarding demographic) are examples of Nike's related diversification.  All of these companies under Nike's guidance can be termed relatedly constrained as corporate management only pursues industries that share numerous resource and capability requirements (such as technological and distribution linkages) within Nike's original corporate edict and can be linked easily linked by such.  Nike uses their diversification to spread out risk and to capitalize on potential profitable opportunities.

Cole Haan's Wingtip Oxfords with Nike's Lunalron  Cushion 

Being a huge global outsourcer, Nike also implements supplier diversification across the globe.  Nike uses manufacturers in as many as 35 different companies (the far east region primarily: China, Indonesia, Thailand, and Vietnam) to produce its product lines.  This gives Nike the flexibility to move into emerging markets as they see fit.  The financial economies of scope are realized through this flexibility by reducing risk and providing tax benefits that afford Nike even greater potential economic margins.  


By diversifying itself along these lines, Nike has created a sustainable corporate strategy that will lead to profits for all of its stakeholders now and into the future.






  

Vertical Integration Strategies at Nike

In the early days of Nike, the company was very much vertically integrated as basically their entire value chain was housed under their "roof".  However by the mid-1970s Nike's product mix had grown to be diversified beyond their manufacturing capabilities and the potential value added in expanding and continuing these vertically integrated strategies could not be justified any longer.  Nike shut down manufacturing processes, but maintained and even ramped up hierarchical governance within the remaining domain of the firm.

Nike, Inc.President & CEO Mark Parker

Modern day Nike is a much more vertically disintegrated or specialized firm that focuses its efforts into an innovative focus in designing and marketing their athletic textiles and brand. Manufacturing in a sense takes away from this focus so it is nothing more than an afterthought in Nike's total corporate strategy plan.  In regards to the decisions leading up to this strategy of vertical integration then and now, Nike's positions can be explained by three logic-based choices: transaction costs economics, capability theory, and real options theory.

The athletic textile market is ever changing in technologies and customer preferences so following transaction-costs logic Nike decided that the uncertainty of the market would demand extensive changing and reinvention of supply chain processes.  The value from doing this in-house would not add enough value to justify these costs.  Nike instead uses outsourcing from capable manufacturers to provide their products at the lowest costs to the company and hence create the greatest economic profits for them.


In a resource-based approach to Nike, their products are unique offerings within consumer preferences but on the whole shoes, apparel, and sporting goods are not valuable, rare, or costly-to-imitate type offerings.  Suppliers need not be heterogeneous toward manufacturing these, in fact many of the same suppliers produce competitors products simultaneously.  As alluded to above, Nike does vertically integrate within certain areas of the company that do in fact produce valuable, rare, or costly-to-imitate characteristics for the firm.  Their vast history and dominance within the market have created a know-how that's virtually unsurpassed and their research and development teams are at the bleeding edge of the market.  Keeping these processes within the firm's walls separates Nike from the competition.


Finally in discussing Nike's vertical integration with a real options approach it's easy to see that they must maintain flexibility due to the dynamics of customer tastes.  Nike has to satisfy many different consumer demographics so to do this they stay away from investing too much into any one area.  Maximizing strategic flexibility insists that they outsource the manufacturing processes and harbor an innovative corporate culture under its "umbrella".  By keeping their real options open, Nike can also be ready in the event that new potential competitive advantages appear such as technologies.


Couple all these thoughts and theories together, Nike's stance of intermediate governance is exactly what is needed to maintain a sustained competitive advantage with a flexibility to adapt to the market and its costs.  Remaining less hierarchical is what affords them this opportunity and allows them to remain the market leader in athletic textiles.

Tacit Collusion: Nike's Collusion Strategy?

Tacit Collusion in regards to Nike

I preface this but saying that I'm not accusing Nike of collusion, but more so the allusion of the potential collusionary practices that could be put in place for the benefit of all in the marketplace.  With that said, Nike's market is a prime suspect for such business strategies.

The sport/athletic textiles market is one that is dominated by few competitors with the market power being concentrated amongst a select few making it an oligopolistic market.  Luckily for Nike they are in this select group and are actually the "price leader" within the industry.  With that power comes great responsibility to themselves and their common rivals in implementing their competitive/cooperative strategy of producing superior economic performance for itself within collaborative constraints with rivals firms.  This practice of such is called Tacit Collusion.

Nike along with its traditional competitors, Adidas and Reebok, have established a pseudo-industry social structure over the years that each knows its proper placements and strongholds in the market (i.e. Nike being a basketball product leader, Adidas in soccer and Reebok in fitness/exercise).  The mix of hard and soft signals between these market leaders established protocols for the pricing and outputs so that each could, in theory, obtain superior economic profits rather than through pure competition.  

However with an influx of new entrants over the past couple of decades (i.e. Under Armour), these companies have reevaluated their stances in meeting the product differentiation and cost leadership strategies of their new rivals with individual strategic choices in mind.  Only recently has the market seemed to re-balance itself with these new "partners" as products are differentiated, albeit minutely in general, and prices are somewhat stable across the board.  Granted new hard and soft signals have been implemented to obtain this stability (Nike investing in new technologies and merging/procuring other companies such Umbro, Cole Haan and Converse), but on the surface it seems that although the companies are different in products and advertising, they are essentially balanced with their marginal cost-marginal revenue structures according to scale.