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.

Product Differentiation at Nike

Ways Nike Differentiates Its Products

The athletic apparel market is one that is competitive and highly dynamic.  Products must be distinct, bleeding edge and top-of-line for any firm to have a chance at grabbing a hold of any competitive advantage more less sustaining one.  Nike, being the world leader in this market, takes these customer perceptions to heart and continually produces products that separate itself from the pack.

The product differentiation attributes that Nike pays great attention to are the uncanny product features and the timing of introducing their products to market.  Creating new technologies in material and designs that are continually updated to reflect consumer preferences create a niche that others try to copy but never can sustain Nike's pace.  Plus Nike always seems to be ahead of the curve in introducing their newest products just as the market begins to crave them.  New products like the recently released Flyknit shoes that blend a new knitted pattern of yarn and fabric into a lightweight, breathable running shoe just as soon as summer starts creeping into the public's psyche is a good example.

Another big part of Nike's product differentiation strategy is its relationships with its customers.  Being the worldwide leader of athletic textiles for the better part of half century has given Nike a sort of "high ground" in the market.  Customers feel that Nike's reputation in athletics is somewhat superior over all others and by default pick their products more often than not just because of this.  Also Nike is well known for their great marketing techniques with many of the world's most well known athletes serving as spokes models, witty ads and commercials, and the "Just Do It" slogan that is synonymous with the brand.  Additionally, Nike reaches out to the consumers with product customization offerings to further offer a different product experience as well; i.e. the NikeID brands of clothing, equipment and footwear that allow customers to modify the colors, materials and even monogram their products however they see fit. 

Not to be overlooked, Nike engages in many linkages with other firms and has a diverse product mix.  The Nike brand is seen around the world through the linkages they have with most every sport on the planet.  The Nike Swoosh is on everything from NCAA college footballs to Olympic sports uniforms pushing the brand out there into every sport's athletes' or wannabe athletes' brains.  Nike even cross links with non-athletic companies to implement new avenues for their consumer, for instance with the Nike+ run tracking software made in conjunction with Apple's iPod and iPhone.  As one can imagine, more often than not Nike will not only be on one "part" of those performing athletes, but more likely that person will be outfitted in a complete Nike product mix from head to toe.  Consumers will find that they like one product from Nike, say shoes, and then see another offering, like sunglasses, and automatically correlate the former's high performance to the latter rather than pursue an unknown brand.

     

                                            Nike ID                                                                                    Nike+

Nike most definitely has a sustained competitive advantage with these strategies in place and will continue to be an innovative market leader as long as they continue to utilize them.

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.

Evaluating Nike's Strengths and Weaknesses: The Resource-Based View

VRIO Framework of Nike

In determining the true resource-based, internal sources of Nike’s competitive advantages, a VRIO Framework is necessary. By singling out those internal resources that are heterogeneous (difference between Nike’s resources and the competitions) and immobile (the competition’s ability to mimic Nike’s resources), we can see where Nike’s true strengths and weaknesses lie.

Value – Does Nike’s resources and capabilities enable the firm to respond to environmental threats or opportunities? Yes, Nike has been the global leader of the athletic textile industry for some time, garnering much experience and know-how along the way. The massive vertically integrated nature of Nike, from research and development to the manufactured finished product, has allowed them to pursue totally new markets in a first mover fashion (casual clothing fashion lines like the Cole Haan) or enter established markets and ward off competition threats with their market leader superiority (Nike Dri-Fit sweat wicking material versus Under Armour Charged Cotton sweat wicking material). By utilizing their knowledge base, Nike can use their resources and capabilities to exploit numerous market opportunities.

 

Ad for Cole Haan/Nike

Rarity – Are Nike’s resources currently controlled by only a small number of competing firms? Yes, Nike’s ability to invent and reinvent their entire product list for the better is unmatched in the industry. Granted others might be able to gain temporary competitive advantages due to a micro-focused view on one particular market segment (for example CCM hockey equipment), but Nike’s resources and capabilities allow it to move swiftly to either copy or make better that original company’s attempt at competitive parity (Nike-Bauer hockey equipment merger).

Imitability – Do firms without a resource face a cost disadvantage in obtaining or developing Nike’s resources? Yes, the ingenuity of Nike’s products involves tried and true knowledge developed through the extensive research and development labs housed within the company that is expensive to duplicate. Even if a competitor does successfully imitate Nike, they then have to fight the market perceptual dominance that Nike has over its customers within its market. The Swoosh is all powerful within the market and therefore unique in its industry. 

Organization – Are Nike’s other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources? Most definitely. Nike’s leadership has organized the company in such a way that its innovative nature consistently produces sustaining profitable results within the market. Being ahead of the curve of the athletic footwear market some 50 years ago gave it a foothold into not only shoes, but all things athletic. Sustained competitive advantages will continue as long as Nike continues on this path.

In conclusion, it is apparent that Nike has a sustained competitive advantage. The distinctive competence within Nike’s resources and capabilities allow it to be risky and innovative but at the same time remain profitable with current and traditional offerings. Unless extreme unanticipated changes within its market occur, Nike will be a market leader from now and into the future.