January 10th, 2018
Nike strategy – External Environment
Nike’s performance influenced by factors such as the market organization, level of competition in the market and the extent to which PESTEL factors affect the entity’s success.
Nike operates in sports’ and fitness activities’ footwear, apparel, equipment and accessories markets. The industry is comprised of individual and institutional customers. Institutional customers include international organizations such as FIFA and UEFA, and national organization such as the national associations for soccer, basketball and athletics in various countries. The entity’s customer profile is thus wide-ranging with including premium customers who purchase performance and training equipment for individual training, and non-premium customers who purchase the sporting kits for use in low-income countries. Nike’s industry is thus segmented into low and high-income segments. Due to its global nature, Nike’s industry is affected by volatility in macroeconomic conditions and exchange rate fluctuations in the regions it conducts business (Edgar Online 10; 24). Its trade in the luxury segment casual wear also implies that its financial performance is subject to household incomes, which are, in turn, subject to the prevailing economic climate.
According to North American Industry Classification System (NAICS), Nike’s core operations can be identified into the NAICS codes 3162 and 33992. The 3162 code represents manufacturing sector, leather and allied manufacturing subsector and footwear manufacturing industry group (U.S. Census Bureau 1). The 33992 code represents the sporting and athletic goods manufacturing (U.S. Census Bureau 1). The entity’s competitors include Adidas and Puma. Adidas is the major competitor with its acquisition of Reebok in January 2006 (Reebok International Ltd. 1), which enhanced Adidas’ presence in the footwear industry in the North American market.
Level of Competition in Nike’s External Environment
The level of competition existing in a particular industry arises out of forces that make the industry attractive for investment. Such forces, as highlighted by Porter are the ease of entry for new players, the threat that substitutes pose, the bargaining power of buyers, the suppliers’ bargaining power and the rivalry among firms existing in the industry (4-5). These forces affect an entity’s costs, prices of its products and the investment it needs to make to succeed, thus affecting its profitability. The impact of these forces on Nike is considered in subsequently.
The threat of new entrants within the industry that Nike operates is low. This arises because Nike and existing competitors have strong brand identity in the market. Accordingly, new entrants would need to invest in large marketing programs to ensure that their brands achieve a significant level of customer awareness. Existing market players spend substantial investments in marketing, for instance hiring celebrity sports personalities and sponsoring major competitions (e.g. Fifa world cup) across the globe. Accordingly, new entrants may find it difficult to invest in marketing programs that are at an equivalent level to those of the existing players. The threat by new entrants is also lowered by existing strategic alliances in the industry. Adidas for instance bought Reebok to increase its footwear sales in North America whereas Nike’s wholly-owned subsidiary, Umbro, helps it to increase its market for soccer-related sporting wear, equipment and accessories in Europe and the U.K (Reebok International Ltd. 1; Edgar Online 1).
The threat of substitutes in the industry is moderate. Nike and its competitors operate mainly in the sporting industry where individuals and institutions demand for specific products. Additionally, in the sporting industry, there are few alternatives to the products offered by the competitors due to regulations by sports associations specifying standards for apparel, equipment, accessories and footwear to be used in various competitions. However, considerable effect of substitutes arises with respect to casual wear not related to sporting events. Multiple providers of apparel and footwear offer alternative casual wear that affect the attractiveness of Nike’s products in non-sporting, unofficial events.
The threat by suppliers is moderate. Nike sources most of its products from suppliers located outside North America, a substantial part of them being independent contractors in China and Taiwan (Edgar Online 4). Nike thus must have contractual agreements with such contractors to ensure that they meet the minimum capacity requirements that the entity requires to satisfy its demand. Due to its reliance on suppliers located primarily in one region, such suppliers could influence the prices at which the entity procures its product in response to changing economic conditions in that region. The effect of this fore is however moderated by the fact that Nike owns various suppliers who run manufacturing operations within the regions that independent contractors operate from (Edgar Online 4).
The threat from buyers is high. Buyers for sporting equipment, accessories, apparel and footwear include organizations with a significant purchasing power. Nike and other competitors must thus compete for such buyers intensively to get supply contracts for an extended period. The entities are for instance necessitated to pay lump sum amounts to secure contracts to supply equipment and accessories during major sporting events. For the individual consumer, the bargaining power is high due to low switching cost among the competitors in the market. Market offerings are identical with lapses in patent protections allowing competitors to use Technology innovated by Nike to offer similar products in the market (Edgar Online 7). Such aspects lower brand loyalty thus presenting customers with lower psychological barriers to switch to alternative providers.
Competitive rivalry in the industry is very high. Most of the competitors in the market offer identical products thus resulting in a price-based competition. Additionally, Nike, Adidas and Puma are in the same strategic group, having global reach and using identical marketing approaches to lure customers to their products. For instance, use of sports personality to endorse the entity’s products and sponsoring sporting events is a prevalent marketing approach used by all major players in the industry. Although strategic alliances have reduced the number of competitors in the market, such alliances have resulted into strong market players thus reducing the ability of a single player to achieve market dominance. This has increased competition necessitating constant innovation for any player to sustain a considerable market share.
Nike’s Macro Environment
PESTEL factors affect Nike’s performance to a varying extent. Political factors for instance affect Nike’s ability to deliver effective performance with respect to instability that could disrupt its supplier’s activities and its sales in such countries. For instance, political interferences that lead to exclusion of nations from international sporting events could narrow the market for Nike’s products. Political instability could also increase the cost of production thus leading to an increase in prices for products, which would affect the sales of such products especially in the low-income segments.
Economic factors also have significant effects on Nike’s business. For instance, the recent global financial crisis affected the entity’s results leading to a declined income in its 2009 financial results (Edgar Online 5). Although the revenues were on a consistent upward trend during that period, the entity had to incur more costs to drive such revenues thus resulting in lower incomes in 2009 (Edgar Online 22). The effect of economic adversity arises with its lowering of consumer purchasing power such that they reduce their spending on non-essential items. Although Nike’s products are essential with respect to sporting events, they are non-essential with respect to individual’s expenditure on non-sporting related activities – casual wear. The effect of economic aspects also arises with fluctuations in current exchange rates. Such fluctuations can increase the cost for Nike to import products from independent contractors located outside the U.S.
The effect of socio-cultural aspects on Nike’s business is moderate. Sports are universal events that individuals participate in irrespective of their culture, and Nike’s product range ensures that it serves sporting interests in different cultures. Cultural aspects could however affect the entity’s communication aspects thus influencing the extent to which customers from different cultures identify with the brand. For instance, sports personalities used to endorse the entity’s products may not achieve universal recognition with the popularity in sports differing among countries. To achieve extensive brand identity, the entity might thus be required to hire diverse endorsers thus increasing its marketing costs.
Technology is a core aspect ensuring success in the industry that Nike operates. Since constant innovation is a requirement for effective performance in a highly competitive environment, and the industry in which Nike operates is highly competitive, the entity must adopt technology that allows it to offer innovative products. The use of “Air” technology, a process that “utilizes pressurized gas encapsulated in polyurethane” (Edgar Online 7), for instance enables Nike to manufacture high-quality products thus increasing the benefits for its customers. Other technological aspects such as information technology serve a core function in Nike’s communication and coordination of its supply chain (Edgar Online 17), thus technology incompatibility with some of its markets could create a barrier for effective communication and coordination.
Nike’s operations also are affected by environmental factors. Environmental aspects such as caps on greenhouse gas emissions affect manufacturing and other activities of the entity. Additionally, Nike’s operations may be affected by legislation on environmental aspects that specify standards for equipment and accessories to reduce their contribution to environmental degradation. Other legislative aspects also affect Nike’s performance. Among such legislation, labour laws and laws governing taxation and incorporation in countries where the entity operates and owns subsidiaries affects Nike’s performance. Nike and other competitors have for instance received criticism on promoting imprudent labour practices in the regions they source their products from (Boje and Khan 11-12; Doorey 591-592), thus necessitating legislative actions to minimize such practices.
go to part three here.