Nike’s Winning Ways

1.Introduction

1.1Summary of the case:

Thirty years ago, in Beaverton, Bill Bowerman and Phil Knight came up with the idea for Nike’s

waffle tread in order to enhance runners’ traction and speed which they used to make and sell out

of trunk of their car at track meets. Since then, Nike has become such a company that sold $12

billion in 2004 out of $35 billion athletic footwear and apparel industries.

Creating state-of-the-art athletic shoes and publicizing the qualities through guerrilla-style

marketing, these two functional strategies together facilitated business model and this amazing

growth came up. Its marketing campaign positioned its shoes as superior, fashionable and

necessity in sporting interest. In 1987, it increased its marketing budget by six times to pay

celebrities like Michael Jordan to position its shoes as the best and thus persuade the customers.

In 2003, it entered into $90 million endorsement contract with basket ball star LeBron and many

other sports stars to emphasize the uniqueness. As a result, market share soared and revenue was

$9.9 billion in 1998.

In 1998, sales began to fall and thus profitability was decreasing. Nike’s $200 Air Jordans lost

marketability and jamming up the stores and warehouses as well as new design for shoes of

better perceived quality by customers was not prepared. To restructure the business model, Phil

Knight, retired one, came back and started recruiting talented top managers from consumer

product companies in order to improve the business model and it did so in fundamental ways.

Earlier years, Nike used to focus more on making shoes for the track and basketball markets to

build market share and neglect sports like golf, soccer, rollerblading and so on. When it

confronted downward trend of sale, it realized the need to sell in more segments of the athletic

shoe market whereas sales in a particular market segment can boost revenue and profit to a

limited extent. So, Nike finalized new design and marketing competencies and began to craft

new lines of shoes for new market segments e.g. launching new soccer shoes and perfecting

design. In 2004, it captured the biggest share of the soccer market from Adidas. In the same year,

it launched total 90 III shoes for casual soccer players all over the world who just want a pair of

shoes to play in. In addition, their effective marketing campaigns positioned their shoes as soccer

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Nike’s Winning Ways

a part of soccer lifestyle and thus persuading the customers that sneakers do not serve like the

soccer shoes as these are sleeker and fit the feet more snugly.

Nike acquired other footwear companies that had extension or complementary in its product

lines just to penetrate the new market which was decided to take advantage of its design and

marketing competencies i.e., acquisition of Converse, Hurley International and official starter, a

licensor of athletic shoes and apparel whose brands include the low priced shaq brand. Sales of

sneakers increased since Converse took advantage of Nike’s competencies and as a result, it

made important contributionin Nike’s profitability.

In the 1980s, it bought Cole Haan, a dress shoemaker, to enter another market segment and in

search for another possible acquisitions and by 2004, sale were over $1 billion since it decided to

enter the athletic apparel market. To increase market share and profitability, it tried finding ways

to invest capital in new products and the development of new product for new market segments

is ongoing;. It enjoyed a rise in ROIC from 14% in 2000 to 24% in 2006 and made over $1

billion profit.

2.0 Company background:

2.1 Origin and History

Nike, Inc. is a major publicly traded sportwear and equipment supplier based in the United

States. The company is headquartered near Beaverton, Oregon, which is part of the Portland

metropolitan area. It is the world's leading supplier of athletic shoes and apparel and a major

manufacturer of sports equipment with revenue in excess of US$18.6 billion in its fiscal year

2008 (ending May 31, 2008). As of 2008, it employed more than 30,000 people worldwide. Nike

and Precision Castparts are the only Fortune 500 companies headquartered in the state of

Oregon, according to The Oregonian.

The company was founded in January 1964 as Blue Ribbon Sports by Bill Bowerman and

Philip Knight, and officially became Nike, Inc. in 1978. The company takes its name from Nike

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Nike’s Winning Ways

the Greek goddess of victory. Nike markets its products under its own brand as well as Nike

Golf, Nike Pro, Nike+, Air Jordan, Nike Skateboarding and subsidiaries including Cole Haan,

Hurley International, Umbro and Converse. Nike also owned Bauer Hockey (later renamed Nike

Bauer) between 1995 and 2008. In addition to manufacturing sportswear and equipment, the

company operates retail stores under the Niketown name. Nike sponsors many high profile

athletes and sports teams around the world, with the highly recognized trademarks of "Just do it"

and the Swoosh logo. [1]

2.2 Acquisitions by Nike:

As of November 2008, Nike, Inc. owns four key subsidiaries:

Acquisition year Acquired Company Product Type1988 Cole Haan Dress shoemakerFebruary 2002 Hurley International surf apparelJuly 2003 Converse Inc. All Stars footwearMarch 3, 2008 Umbro sports apparel

Other subsidiaries previously owned and subsequently sold by Nike include Bauer Hockey and Starter. [1]

3.0Theoretical background

3.1 Strategies in fragmented industries

A fragmented industry is one composed of a large number of small and medium sized

companies-for example, the dry cleaning restaurant, health club and legal service industries. To

grow, consolidate their industries, and become the industry leaders, companies use strategies

such as chaining, franchising, creating horizontal mergers and also using the Internet and

information technology (IT) to follow cost leadership or differentiation based business model.

Chaining- Establishing networks of linked merchandising outlets that are so interconnected by

advanced IT to function as a single entity. Results in consolidated buying power with large price

reductions in supplies and promotes competitive advantage.

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Nike’s Winning Ways

Franchising- Provides the franchisee with the right to use the franchisor’s name, reputation, and

business model in exchange with franchise fee and a portion of profit.

Horizontal Merger- Companies join together and conduct business to obtain economies of scale

or secure a national market for their product. As a result, they are able to pursue a cost leadership

or a differentiation based business model.

Information technology and the internet- Gives a company the opportunity to develop new

business strategies to consolidate a fragmented industries.

3.2 Strategies in Embryonic and Growth Industries

An embryonic industry is one that is just beginning to develop and a growth industry is one

which first time demand is expanding rapidly as many new customers enter the market.

Embryonic industries emerge when a technological new product introduced with opportunities

and transforms into growth industry when a mass market starts to develop for the industry’s

product. This development of markets is dependent on the changing nature of market demand.

Based on this demand difference, market grows and shapes over time. The first group of

customers is Innovators, first to purchase and experiment the product. Early adopters are the

second group to enter the market. The next group, early majority signifies the beginning of the

growth stage. Following them, late majority comes up when they are sure the about the use of

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Nike’s Winning Ways

the product and it will be around for a long time. Laggards, the last group of customers are

conservative and technophobic. [4]

Market growth rate and factors: Market of all products does not grow at a same rate since some

factors are there to influence the market growth of the product.

1. Relative advantage- perception of cost-benefit analysis.

2. Compatibility- consistency with customer needs

3. Complexity- difficulties to understand and use

4. Trialability- experimenting the product with hand-on trial basis

5. Obervability- visibility and appreciation of others

3.3 Strategies in mature industries

A. Strategies to deter entry: Three main methods to deter entry by potential rivals and hence

maintain and increase industry profitability. These are-

i. Product proliferation- Filling the niches or catering to the needs of customers in all

market segments to deter entry in known as product proliferation.

ii. Price cutting- The strategy is to cut prices every time a new company enters the industry

and raise prices once the new entrant has withdrawn.

iii. Maintaining excess capacity- Maintaining the physical capability to produce more of a

product that customers currently demand.

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Nike’s Winning Ways

B. Strategies to manage rivalry: Unrestricted price rivalry reduces both company and

industry profitability and some strategies are there to manage this.

i. Price signaling- means of controlling rivalry among competitors intended to improve

industry profitability. Through this companies change product prices to convey their

intentions to other companies and so influence the way they price their products.

ii. Price leadership- Most favorable industry pricing option to reduce price rivalry and

enhance profitability in a mature industry.

iii. Non-price competition- aimed to prevent costly price cutting and focus more on

differentiation as principal tool to deter potential entrants and manage rivalry. (Applied to

new market segments, not new markets). Some of these are-

a) Market penetration means expanding market share in its existing product markets such

as use of heavy advertising to promote and differentiate the product.

b) Product development means the creation of new r improved products to replace existing

ones.

c) Market development means finding new market segments for a company’s products by

capitalizing brand name from one market segment into another.

d) Product proliferation refers to offering a product in each market segment or niche and

compete head-to-head for customers.

iv. Capacity control- Price competition does periodically break out when excess capacity

exists in an industry and it arises when companies collectively produce too much output

and to dispose of it they cut price.

a) Factors causing excess capacity- technological development, new low

cost technology.

b) Choosing a capacity control strategy- to preempt rivals and coordinate

among them would bring about favorable outcomes.

3.4 Strategies in Declining Industries

Leadership strategy- Aims at growing by picking up the market share of companies that

are leaving the industry and effective when i) it has distinctive strengths and ii) moderate

speed of decline exist.

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Nike’s Winning Ways

Niche strategy- which focuses on pockets of demand that are declining more slowly than

the industry as a whole.

Harvest strategy- to get out of a declining industry and optimize cash flow in the process.

It requires to cut all new investments in capital equipment, R&D etc.

Divestment strategy- the strategy that a company can recover most of its investment in an

underperforming business by selling it early, before the industry has entered into a steep

decline.

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Nike’s Winning Ways

4.0 Questions & Answers

Question #1: What business model and strategies is Nike pursuing?

In the case scenario it has been provided that Nike’s amazing growth came from its business

model which has always been based on two functional strategies:

a) Creation of state-of-the-art athletic shoes

b) Publicizing the quality of the shoes through dramatic guerrilla

style marketing

Since Nike was competing in such an industry which was mature in business life cycle and

naturally, there was immense competition to attract and retain the customers in order to increase

profitability. However, Nike did not play price wars in that competition since it would reduce

profitability for industry and the players in it. Nike, to combat, the competitors followed

nonprice competition strategy in order to maintain and increase its market share and

profitability

Product development (improving product design): Generally, the state of the art refers to the

highest level of development which is somewhat related to product development. Because

product development means the creation of improved products. Here, Nike focused more on

product quality to differentiate in the industry. Nike followed this strategy to maintain and

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Nike’s Winning Ways

increase its relative competitive position in the expanding market and as a result, its market share

soared in 1998. In the same year, when Nike confronted a sudden decline in sales, it came up

with its new line of shoes for soccer market and perfected their design over time which really

turned out to be profitable step. Developing the product became again crucial for Nike which

reflected with the advertising message that soccer shoes are sleeker and fit the foot more snugly.

As a result, they made profit out of it. So, Nike put efforts on product design for each market

segment it is serving including the acquired ones whether it be the athletic shoe, dress shoe,

athletic apparel etc. Still it is focusing more on developing new and improved products in new

segments so that it can maintain and increase its upward trend in ROIC. [5]

Market Penetration (expanding market share): Since Nike concentrated more on expanding

market share in its existing product markets and also promoted its shoes through heavy

marketing, it can be assumed that Nike pursued market penetration strategy. It came into several

contracts with many popular athletic celebrities just to influence customer’s brand choice and

create a brand name reputation for Nike and its products. In 1987 it increased its marketing

budget by six times from $8 million to $48 million and in 2003; it signed a basketball star

through $90 million endorsement contract. As a result, of this huge marketing campaign, it

started enjoying a rise in its market share as well as profit until its Air Jordan lost marketability.

Nike also used heavy marketing when it launched total 90 III shoes in 2004 for millions of

soccer player throughout the world. In this situation, Nike portrayed its shoes as a part of the

soccer lifestyle saying that these are sleeker and fit the foot more snugly. [4]

Market Development (looking for new segments): In 1998 when sales started to fall, Nike to

raise its sales again tried to develop its market. In earlier years, it ignored sports like golf, soccer,

rollerblading and so on and focused more on making the shoes for the track and basketball

markets to build its market share in these areas. Later it started to serve the other segments in

athletic industry with new design and competencies. Consequently, Nike had won the biggest

share of the soccer market from Adidas when Nike launched soccer shoes and perfected the

design over time. Nike had put effort in this segment and it also had capitalized its brand name

from its previous segment. To conduct business in more segments and thus ensure increased

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Nike’s Winning Ways

profitability, Nike was seeking for more market segments to serve. When it came into several

acquisitions it got some opportunities to use its design and marketing competencies. It had

acquired Converse, the maker of retro-style sneakers, Hurley international, Official starter and

some other companies. These ventures for Nike turned out to be profitable and added to the

profitability source of Nike. Nike’s most courageous acquisition was taking over Cole Haan, the

dress shoemaker in the 1980s. Because, it was a little different segment for Nike and it was still

in search of some other possible acquisitions. Moreover, Nike had also decided to enter the

athletic apparel market to use its skill and by 2004, sales were over $1billion. [5]

Acquisition (horizontal Merger): By the time, Nike has already achieved superior competency

in design and marketing, to take advantage of it, it decided to enter new market segments. As a

result, Nike went through several acquisitions and introduced with new market segments. The

acquired firms has extended or complimentary product lines. These acquisitions allowed Nike to

enjoy increased market share and an upward trend in profitability which was certainly desired by

Nike. There were sneakers maker, skateboards maker, dress shoemaker and athletic apparel

maker in the list of acquisition. [4]

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Nike’s Winning Ways

Question #2: How has Nike’s business model changed the nature of industry competition?

Nike did not play solely in the industry for increasing profitability. There were some other strong

players fighting for the same piece of cake. However, Nike’s business model and strategy

brought about a lot of change in the industry competition.

In earlier years, Nike was serving track and basketball market segments in the athletic footwear

and apparel industries. Later, it joined in some more segments through expanding its product

lines in soccer, skateboards,, dress shoes and athletic apparels. Nike also took over some

companies in these segments just to make profit out of it. [4]

Change in the nature of industry competition :

Focused Product development: One important thing is that Nike confronted lower sales in 1998

when its Air Jordans basketball shoes faced decreased sales and at that time it was hard for Nike

to introduce new designs. It sent a signal to the market that customer demand primarily is based

on design, not the aggressive marketing strategy. Because at that time, Nike had used a dramatic

marketing campaign showing that its products were superior and fashionable. To add value to

this product, celebrities were sponsored and promoted for the products at a huge expense. It

initially worked out but later sales fell due to design shortage. After that Nike revised its business

model aiming at some other segments and got back in the track.

Decreased competitors by acquisition: Nike’s unique business model affected the industry

competition in such a way that it entered into different market segments in different times. As a

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Nike’s Winning Ways

result, competition intensified and market share had to be shared among the players. When it

entered into soccer market, it took away the biggest share of market from Adidas, a giant player

in the industry. When it started taking over other companies, it sent a signal to the competition

that players are decreasing but a gigantic one is coming up with more strength and resources

invested in the venture. The notable point is that industry was expanding in terms of customer

base or revenue. However, competitors found it profitable to liquidate business and thus

competitors decreased in exchange with increased competition. Because Nike’s competitive

actions were much stronger.

Increased marketing campaign: Another thing is that Nike, besides entering different

segments, improved product design and marketing tactic. With the increased competition, it was

quite impossible for any player to stay in business without doing anything. Since the customer

base Nike improved, it was mandatory for all including Nike to introduce and improve new

products to attract customers. Huge expenditure in marketing campaign was also became an

important tool. Because producing does not earn profit rather selling earn profit. So marketing

campaign has got something to do with sales and profitability. All the competitors realized that

customers have to be reached whatever the level of uniqueness in product they possess.

Growth/declining industry: The ultimate goal of Nike was to make profitability higher through

increased market share. Its ROIC has soared from 14% in 2000 to 24% in 2006, and it made over

$1 billion profit. Although it is enjoying huge profit, it still is looking for other possible

acquisition. It is constantly finding ways to invest its capital in new products where it could

continue its trend of profitability. This continuous investment of Nike in athletic footwear and

apparel industry indicated that industry is better off and thus Nike can make such amount of

profit. But the companies those were operating and at a certain point, sold out to Nike reflected

risky future. As a result, competition could turn to unfair since some more competitors might be

wiped out from industry. [4]

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Nike’s Winning Ways

Question #3: What new strategies have emerged in the shoe industry as a result?

The athletic footwear industry is a challenging and saturated market. Intense competition,

fashion trends, and price conscious consumers have slowed growth in this industry.

Manufacturers are combating sluggish sales with radical new styles, along with offering more

styles at lower price points.

Emergence of new strategies:

Dynamism: Nike’s success story suggests that a company’s business model cannot remain

static. It shows how managers of a successful business model still need to continually formulate

and implement new business-level strategies to sustain their firm’s competitive advantage as the

industry environment changes.

Reaching the target market: Companies are looking for new ways to boost sales by

capitalizing on direct Internet sales to consumers. Many companies are also increasing

profitability by transferring production to cheaper offshore facilities. This segment has reached a

point of maturity in the domestic market and can look forward to only modest sales growth for

the long term. However, sales are improving slightly, especially in the areas of running shoes,

cross-trainers and basketball shoes. Therefore, companies with strong brands will increasingly

turn to international markets for growth.

New means of marketing: The sports apparel companies are modifying their business model

because they feel they can get a bigger bang for buck by shifting spending away from traditional

media and moving more money into social media. For athletes, they might go to zero on athletes

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Nike’s Winning Ways

who can demonstrate a high ROI as measured by the number of Facebook fans and Twitter

followers they have. For teams, Nike is concentrating on those that exhibit the most activation

and engagement with the most number of core fans via social media. [2]

Change in Focal Point: Nike has been competing in the industry in such a way that competitors

realized that they have to create demand for product through marketing and advertising, our

presence in sports and our relationships with athletes (sports marketing). To be successful as like

as Nike, the world of sport must be successfully promoted. To build their business, they have to

fuel and respond to consumer interest around the world and continually appeal to changing

demographics and new markets in a deeply competitive industry.

Superiority in these following areas is Nike’s strength which might be readily followed by

competitors, although they have these but of limited efficiency:

Patents & Branding: One of the exclusive licenses that distinguishes NIKE from the rest of its

competitors is the patented “Air” technology that the company uses to sell footwear. Although

some NIKE AIR patents have expired, NIKE still holds a number of subsequent NIKE AIR

patents, and patents that cover specific features in various athletic and leisure shoes that will not

expire for several years. In addition, the company places a significant emphasis on its Research

and Development, Production and Marketing, and Design departments to maintain its

competitive edge. Nike enjoys the popularity of its brand name, which is recognized all around

the world. Besides the brand name, the company also has a trademark for the ‘Swoosh Design’

logo that identifies NIKE Inc. [6]

Differentiation: Product differentiation is healthy in the footwear industry and allows the

company to increase its profits through the sale of different products. Another advantage of

manufacturing a number of product lines is the reduction of risk in that if one product fails there

are numerous other products to compensate for this loss. Companies in the apparel and footwear

industry that concentrate on manufacturing a single product are at a great disadvantage since

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Nike’s Winning Ways

their revenues depend exclusively on the sales of only one type of product, therefore, increasing

the potential default risk. [6]

5.0 Concluding Remarks

Nike, Inc. is a marketer of sports apparel and athletic shoes. The American manufacturer,

through its marketing strategy which rests on a favorable brand image, has evolved into a large

multinational enterprise. In keeping with the brand image is its association with the distinctive

logo and its advertising slogan, "Just do it." In order to maintain and sustain this image, the

company makes huge investments in advertising and brand promotion.

Its promotional activities include agreements for product sponsorship with professional athletic

teams, celebrity athletes, and numerous college athletic teams. Nike is involved in the production

of goods for a wide variety of sports, competing with every sports fashion brand in existence.

Because of the absence of any single brand that rivals the products of Nike, the company has no

direct competitors, with the exception of German company Adidas. This has helped popularize

the brand worldwide in all areas of sport and sports fashion. [3]

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Nike’s Winning Ways

References:

1. http://en.wikipedia.org/wiki/Nike,_Inc .

2. http://blogs.forbes.com/mikeozanian/2010/08/05/nikes-new-business-model/

3. http://www.blurtit.com/q173791.html

4. Theory of strategic management with cases, Charles W. L. Hill and Gareth R. Jones, 8th

edition, Industry environment and business level strategy

5. http://www.nikebiz.com

6. Nike’s Overview, Investment and Equity Research, St. John’s University Student

Managed, April 4, 2004

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