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.