Free Research Paper On Nike, Inc. Internationalization
Nike, Inc. (and its subsidiaries) is easily one of the largest companies involved in designing, manufacturing, distributing and marketing athletic apparel, footwear, sports equipment and accessories for multiple fitness and sports activities. With operations across North America, Europe, Asia, Africa and the Middle East, Nike has is headquartered in Oregon. Nike, which employs 48,000 people, posted upwards of $25,313 million and $3,254 in revenues and operating profits in the year 2013. In the United States alone, Nike has 171 Nike Factory stores, 72 Converse stores, 33 Nike-in-line stores, and 28 Hurley stores, served by five distribution centres based in Memphis, Foothill Ranch, and Ontario.
Nike’s operations are divided into six administrative segments i.e. North America, Central and Eastern Europe, Western Europe, North America, Japan and the Emerging Markets. Nike also has a broad division called “other,” which comprises three sub-categories. The global brand division includes Nike brand licensing business that is separate from the geographical operational segmentation. The second sub-category is the demand creation & operating overhead for the centrally controlled Nike brand, as well as the expenses associated with the supply chain and product development. The third sub-category comprises Nike’s subsidiaries such as Hurley and Converse (Nike, Inc., 2015; Yahoo Finance, 2014).
Nike’s product portfolio falls in eight categories i.e. basketball, running, men’s training, football, action sports, sportswear, Jordan/Nike Golf and women’s training. The company also markets children’s products, athletic and recreational clothing/equipment including lacrosse, baseball, football, tennis, outdoor activities, wrestling, and horseracing. Other than the actual sports supplies, Nike also sells apparel and other accessories, including licensed professional and college team brands. The company is also involved in the design, production and marketing of performance-enhancing equipment (bags, protective gear, bats, digital devices and golf clubs) and other equipment under its brand, the All Star, the Chuck Taylor, One Star, Star Chevron, Jack Purcell and Converse trademarks.
Causes of Internationalization
Nike began expanding outside the United States began in 1972, when it moved into Canada, followed by subsequent expansions into Australia, South Korea, and Japan between 1974 and 1977. The company has since expanded operations across all continents. The main reasons for expansion included (MarketLine, 2014; Yahoo Finance, 2014):
Revenue and profitability expansion – Global expansion meant that Nike could increase its market, especially since the international market had few direct competitors to the company’s products. In addition, while the United States represented and still is, a major market for Nike, it is a mature market, characterized by slow growth and intense competition. In order for Nike to expand, it had to expand into markets that were expanding and had relatively less competition. Nike has continued with this strategy to increase revenues and profitability to this present day. In 2013 and 2014 for instance, Nike drew upwards 58% and 53% of revenues respectively from outside North America. A breakdown of the revenues is as shown in the table below. It is clear that if Nike had chosen to remain within the United States, its revenues today will be markedly lower than they actually are.
Adjacency Moves –Nike, Inc.’s expansion outside the United States was also driven by multiple dimensions of adjacency as perhaps best evidenced by the choice of expansion destinations. The expansion into Canada was mainly driven by the similarity in tastes, income and other demographic characteristics between the American and Canadian consumers, which meant that if Nike products had been successful in the US, they were just as likely to succeed in Canada. This was followed by similarly placed high-income countries including Japan and Europe (Rugman & Collinson, 2012; MarketLine, 2014).
Short and Long term Stability – Reliance on the United States market alone meant that Nike was exposed to the country specific risks such as the 2007/2008 Great Recession. With the internationalization strategy, Nike was able to diversify its risk portfolio, effectively ensuring that its country-specific risk exposure was relatively small than could affect its performance. In the long-term, similar diversification means that Nike is protected from adverse changes in any single market. For instance, the US and Western European markets have since seen the emergence of stiff competition from companies such as Adidas, PUMA, and Umbro, but Nike’s huge presence both in these markets and elsewhere has ensured that its performance continues.
Supply Chain Efficiency – The United States and other developed economies are characterized by relatively high production costs, not least because of the high labour costs. Nike has established production partnerships with independent contract manufacturers in low-cost countries such as Vietnam, India, Sri Lanka, Malaysia, Pakistan and China. These partnerships ensure that the company can offer clients lower prices. Nike has also favored a multi-channel approach though its large network of retail stores across the world as well as the internet, to ensure that products can reach customers easily and cheaply. The company already has 171 factory stores and 33 line stores situated in many parts of the world.
Scale Economies – As one of the biggest players in the sportswear industry with sales of more than $25.313 billion in 2013, Nike enjoys massive scale economies, which translate into lower costs and more resources for R&D
Expanding Global Market - The sportswear market across the world has expanded, and as one of the largest players in the market, Nike has always been keen to capitalize on the growth. The total revenues from the sports footwear industry, for example, amounted to $256 billion in the year 2012, having expanded by 3.5% since 2008. Over the same period, the European and East Asian markets expanded by 1.7% and 4.9%. The expansion of the market is forecasted to continue between 2015 and 2017, during which time the market will expand by 4.9%. With the expansion into more markets across the world, Nike has always sought and will continue to leverage increased market potential to grow.
Scale Economies – With a larger market, Nike has increased the capacity of production, and with it, achieved massive technical, purchasing and other scale economies compared to its much smaller competitors such as Adidas and PUMA. The company has more capacity and more resources to invest in R&D, which in turn translates into lower production costs and prices and innovation, which in turn gives the company competitive advantages.
Risk Diversification – With operations across more than 45 countries, Nike is insulated from extreme changes in a few markets from affecting the company’s overall performance and growth. The company has had fairly stable revenues and profits despite economic crises in its key markets in North America, Europe and Asia at different times over its history.
Low Production Costs – With factory stores and independent manufacturing partnerships in low-cost countries such as Vietnam, China and Sri Lanka, Nike can produce its products are relatively low costs. Lower costs mean lower and competitive prices to its global clientele.
Increased Revenues and Profitability - A larger market base translates into more revenues for the company (Nike, Inc., 2015; Statistica, 2015; MarketLine, 2014).
Nike, Inc. as a Multinational Corporation
Multinational corporations are entities with production, assembly and distribution in multiple countries, but centrally controlled from one country. While Nike has headquarters in Oregon, Nike has production and distribution factories and stores in more than 45 countries and territories across the world. Nike, Inc. has its headquarters at the Nike World Headquarters but has regional headquarters in Europe, Asia Pacific (Japan and Singapore), the Middle East, Africa and other regions. Nike also has a network of retailing stores across many countries in the world, coupled by the internet, through which it distributes its products, but this does not make it a global retailer. Global retailers are organized around distribution using coordinated around brands but without necessarily having central control or even ownership. In addition, the mark of a global retailer is the ability to sell products to more than one country, but without having production and operational control in those nations. Effectively, while Nike sells to many countries through its stores and websites, it also has production, distribution and management facilities in those countries (Nike, Inc., 2015; MarketLine, 2014).
Nike, Inc.’s Internationalization Lifecycle
Nike, Inc. is at the latter stages of the growth stages in its internationalization process. The growth stage is characterized by rapid and sustained growth in profitability and revenues. To begin with, the sportswear market has been growing steadily since World War II, which is part responsible for the remarkable rise of companies such as Nike, Adidas, PUMA, Lululemon Athletica, Inc., Uniqlo Co., Quicksilver, Inc., New Balance Athletic Shoe, Inc., Under Armour, Inc., and Li Ning Company Ltd. The world footwear market has expanded by 3.5% between 2007 and 2012 and it is expected to expand even further by 4.9% by the close of the year 2017. While the European and North America, which are characterized by intense competition and slow growth, also expanded over the recent past and are expected to continue expanding.
Perhaps even most importantly, the emerging markets such as China, Latin America, Africa and mainland Asia are characterized by low competition, rapid economic expansion, high population growth and rising consumer demand. In future, opportunities exist for Nike to expand even further, by expanding into markets such as Brazil, China, and South Africa. Even most critically, electronic commerce has gained a central role to international expansion. According to MarketLine (2014), online sales in the United States rose from $165.8 billion in the year 2001 to more than $262.5 billion by the close of 2013. Total e-commerce retail sales grew by 4.3% in 2013 and is also expected to grow in the coming years (MarketLine, 2014; Yip & Hult, 2012).
Lastly, Nike’s growth is evidenced in its rising revenues and profitability both in North America and the rest of the world. In 2014, Nike posted $12,299 million in revenues, up from $11,158 million in the year 2013. A geographical breakdown of the revenues shows that the company is growing and will continue to grow in the years to come. It is clear that Nike still draws the vast majority of its revenues from its North American operations. The revenues from China, the emerging economies, and the global brand divisions are relatively low. However, these markets represent the highest areas of growth, which means that Nike will grow even further in the future.
Consumer Attitudes to Nike’s Products
The consumer perceptions towards the United States are twofold. Firstly, Nike is easily one of the most important players in the global sports clothing industry; the company commands a measure of consumer confidence. It has a strong brand portfolio and more than 14% of the sportswear and equipment market. As such, the attitudes towards the United States are not as influential on the product. On this score, Nike has in the past five years suffered from ethical scandals involving its independent manufacturing partners in low-cost countries. Poor working conditions, exploitation of labour and other malpractices by contractors have had the consequence of damaging Nike’s brand and consumer attitudes (MarketLine, 2014; Leckie, 2014).
However, consumers across the world perceive the US as a melting pot of new technology and innovation, which translates to superior quality products. In addition, the United States has an immense cultural influence on consumer across the world, which in turn makes for a positive tendency towards its products. Sports such as basketball, tennis, baseball, golf, swimming and short distance races have in the past been dominated by the US, which translated to demand for US sporting products supplies. Other influences e.g. the global media and the internet also play a crucial role in encouraging positive consumer attitudes towards products made in the USA. Effectively, Nike’s marketing strategy is geared at building on the United States’ perceived melting pot of technological innovation in sportswear to push its products. It also uses the US’s cultural influence (e.g. the media and the internet) to make the products effectively (Williamsn & Page, 2005; Perner, 2011).
Nike’s expansion and competitive advantage in the past two decades has largely been driven by its controversial reliance on low-cost manufacturing locations in Asia and Latin America. Nike has independent contract manufacturing partnerships that provide the company with fabrics, assembly facilities, and stores. In the year 2013 alone, independent contract manufacturers in Indonesia, China and Vietnam made 25%, 30% and 42% of the company’s total footwear products, which means that it was able to leverage the low-cost manufacturing potential for a considerable proportion of its products. Nike also has manufacturing partnerships with factories in Brazil, Argentina, Mexico and India to manufacture products that are mainly sold in those geographical regions, to reduce the costs and time involved in shipping products long distances across the world. Further, nearly all Nike apparel manufacturing is now done outside North America by independent contractors spread across 28 nations. The vast majority of apparel manufacturing occurs in Sri Lanka, Indonesia, Thailand, Turkey, Malaysia, Cambodia, Mexico, Pakistan and China. Outsourcing helps Nike leverage the advantages of a global supply chain to reduce costs, foster efficiency and flexibility. However, this strategy has come with a number of difficulties that have threatened the Nike brand and the company’s ethical codes. Independent contractors mean that the company has very little control over the manufacturers. Some of the contractors have engaged in unethical and even illegal labour practices, including forcing employees to work long hours in deplorable conditions. These abuses have resulted in a backlash against Nike.
Nike has performed tremendously well over its history. It continues to be a hugely profitable company that has an even bigger potential in the coming years. With a 14% of the global sportswear and equipment market, Nike is a major industry player. It is undeniable that its internationalization has played a critical role in the company’s early growth and subsequent success. This strategy has become even more important in the current market because of the growing wave of globalization that has swept around the world. While Nike is already established in key markets in North America, Europe, Asia Pacific and even China, but not as much in the emerging markets (as shown by its revenues breakdown). The emerging markets represent considerable growth potential (rapid economic growth, high population, expanding middle classes and high consumer demand) and less competition, which is why it is important that Nike prioritize expansion into these markets. While international expansion is both costly and tedious, Nike has the advantage of employing the internet to reach even bigger markets without physical expansion (De Mooij, 2005; MarketLine, 2014).
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