Cost Leadership at Nike

Nike's Cost Leadership Strategy

Nike has a moderate cost leadership strategy within its industry.  There are a few different choices in the marketplace for buyers to obtain athletic shoes, apparel and the like, however Nike's products are distinct for a variety of reasons that enable them to derive economic profit from other means than simply controlling costs.  With that said, the hypercompetitiveness of the few rivals Nike has means that they do have to do their best at minimizing said costs as to maximize their market share and margins.

Nike has significant economies of scale.  As the world's largest producer of athletic textiles and equipment, Nike dwarfs the competition.  A caveat to their manufacturing processes, Nike outsources all of these processes to many Asian countries that does three things, (1) keeps Nike as a company very lean, (2) provides a cheap labor source, and (3) if a manufacturer/supplier increases costs, Nike can simply relocate to a cheaper option further driving down their marginal costs.  Other companies without Nike's clout can't match this ability.  Also considering the worldwide demand that Nike has, the distance to market from suppliers is negligible and not a source of a diseconomy of scale.

Nike has a long history within the sports world that dates back to 1972, which enabled them to assemble a large knowledge base throughout the years.  This knowledge continues to be dynamic within the industry through an innovative Research and Development department that continually creates new advantages in athletic performance (for instance, Nike's recently released Nike Free Gym+ women's shoes that mimic being barefoot for exercise classes such as yoga and the Nike Hypercool 2.0 line of sweat wicking performance clothing to cool athletes as they perform).  These advantages set Nike's products apart and drive customers to them.

                    Nike Free Gym+ women's shoe                                 Nike Hypercool 2.0 Pro Combat Top

Nike definitely has low cost access to factors of production.  The enormity of Nike in respect to their suppliers gives them a huge advantage in production negotiations.  Due to their high volumes for products, the cut-throat low cost nature of selecting a manufacturer, and coupled with the fact that Nike's suppliers depend so heavily on them for their own success that they have little to no bargaining room toward raising prices, allows Nike to continuously enjoy low costs of production.

Nike's hardware and software technology implementations of using the not only using the best materials but creating them in a vertical fashion and housing an innovation culture from the top down, allow Nike a first move advantage into cost savings. However most of these advances only bring definite savings for a short time due to competitive parity within the industry, their creative nature definitely does benefit over the long run.