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.

Nike's Flexibility: Real Options Analysis

Nike's Real Options Under Risk and Uncertainty

The "flexible" Nike Free

Nike has an ingrained protocol to undermine the threat of risk and uncertainty while remaining flexible with its strategic choices.  In particularly, they remain flexible in their manufacturing processes by outsourcing the operations entirely across the globe as to remain agile in adapting to changing economic climates and customer preferences.  Not being burdened by the large capital overhead costs that come from vertical manufacturing integration affords the company flexibility to diversify their product portfolio into riskier endeavors where technical or market uncertainty is apparent but the "rewards" of such can be great.  

Keeping this business option of contracting is much less costly than running their own manufacturing plants as it takes labor costs out of the discussion when determining the real options of pushing product lines. With regards to these costs, Nike also uses its massive market power to negotiate lower charges out of their suppliers further granting more leeway into calculating the Net Present Values of their product decisions.  Considering the ever changing preferences of their customers, this competitive advantage creates real economic value in the midst of their demographic's fickle uncertainties.  Furthermore the absolute path dependency of such would pigeonhole Nike into particular lines that could grow out of favor over time and leave them holding on to declining offerings.  The trade off of lower costs due to focused, in-house manufacturing nor do the switching costs of such create enough value amid these uncertain conditions for Nike to warrant this cost leadership strategy over the flexibility in its product diversification strategy and I do not believe their stance to shift any time soon.