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|NIKE Inc. |
|Transition to Transnationality: A Strategic and Structural Outlook |
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|Presented by: |
|Oluwadamilola Adewuyi |
|Moyosore Oluyinka |
|Patrick Wenkanaab |
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|BUAD 647.085 |
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|Dr. Darlington Richards |
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|11/26/2012 |
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INTRODUCTION

Overview of the Company

Incorporated in 1968 at its headquarters in Beaverton Oregon, Nike Inc. has grown in leaps and bounds into its current status as the world’s largest and leading producer and marketer of athletic equipment, apparels and accessories (Nike Inc., 2009). The company initially started as a small startup business known as Blue Ribbon Sports by Bill Bowerman; selling shoes which he imported from Japan, and later forming Nike to produce his own shoes. Nike Inc. since its formative years has grown into an international company with operations in over 180 countries and employing over 33,000 employees directly in its international operations as well as another 5,000 directly at its head quarter offices in Beaverton (Nike Inc., 2009). The company however faces the challenge of transforming itself into a transnational company due to the size and differentiation of its operations in different locations therefore needing an alternative structure to effectively manage the same operational procedures.

This paper will examine how Nike Inc. can successfully transition itself to a transnational corporation so as to effectively manage its potential. A brief overview of the company; its products and operations, the different types of organizational structures and where it currently stands is initially undertaken to better understand the context and help comprehend general information about the company.

Products and Operations

Nike Inc.’s products are as diverse as are its operations. The products widely range from athletic equipment, apparel and footwear to other products for leisure and casual uses. These are primarily targeted and inspired by a sporty lifestyle; however, these are usually determined by their users and are therefore not limited in such regard (Nike Inc., 2009). The proucts are as well categorized into different sports among which are: soccer, basketball, football, golf, tennis, cheerleading, volleyball, and outdoor activities.(Nike Inc., 2009).

The company’s operations are as well equally diverse ranging between operations in design, production, marketing and selling of the products (Nike Inc., 2009). Nike Inc. from this standpoint has differentiated such operations in accordance to an internal geographic structure, with each organization focusing its business operations on its own type of guidelines. The geographic organization in this case include: U.S. Europe, Asia Pacific, The Americas and Middle East and Africa (further defined as the collective East, Middle East and Africa or EMEA) (Nike Inc., 2009).

Nike as a company is not directly involved in manufacturing its branded products (Nike Inc., 2009). This extends to other elements of its operations that are related directly to manufacturing, for example, sourcing for materials. In this regard, the company has instead contracted many independent manufacturers and factories to produce its designs so as to take advantage of its strengths both locally and internationally. Here then, the company is noted to have contracted firms in at least 34 countries mostly located in the far east where labor is more affordable and there is cheaper access to materials therefore taking advantage of its economies of scale (Nike Inc., 2009).

The company’s operations in its products sector has acquired several other wholly owned subsidiaries that manufacture, market and resell an equally wide range of products. These subsidiaries include: Cole Haan, Converse Inc., Hurley LLC, Umbro Ltd (Nike Inc., 2009). Among these subsidiaries too are many other smaller brands serving different market segments and purposes; they subsequently account for approximately 42% of the company’s total revenues.

Marketing Operations

With regards to its marketing operations, the company generally categorizes this into two significant segments: The U.S. Market and The International Market. The U.S. market is considered a primary market on its own since it contributes 42% of the company’s total revenues (Nike Inc., 2009). To fully capture the potential of the market, the company has over 23,000 retail accounts selling nearly all of its product categories across the nation. Within the U.S., the company also has 20 Nike Sales offices for soliciting business within the nation as well as five other independent sales representatives selling specialty products, especially for Golf and Skateboarding. U.S. sales are further complemented by its online retail store www.nikestore.com and 338 retail stores distributed countrywide (Nike Inc., 2009).

The International Market comprises the second part of the company’s significant market. This accounts for 58% of its total revenues; comprised of over 28,000 retail accounts and numerous independent distributors and licensees (Nike Inc., 2009). These are further complemented by 336 retail stores located across the globe; supplied by 14 international distribution centers (Nike Inc., 2009).

Organizational Structure

Every organization conforms to a type of organizational structure which defines its hierarchical channels, culture and operations. These structures are important in getting things done in an efficient manner; however, organizations may combine the best qualities of different structures to come up with a fitting one to suit their needs (Carpenter, Bauer & Erdogan, 2010). The different types of structures are as well defined by the organizations needs and capabilities and usually range between simple bureaucratic structures to functional and divisional structures and even more complex matrix structures.

Bureaucratic Structures

Bureaucratic structures follow strict hierarchies in terms of management of operations. Such structures are usually simple in nature and therefore fit for relatively small and uncomplicated enterprises (Carpenter et al., 2010). These too may be further sub-categorized as Pre-bureaucratic, Bureaucratic and Post-bureaucratic organizational structures. The main characteristic about such structures however, is that they follow strict hierarchical orders in their operations with enhanced contact and communications between the different levels.

Functional Structures

Functional structures divide a large organization in accordance to the different segments within them, so as to achieve effectiveness and efficiency within each (Carpenter et al., 2010). The structures are in this case divided into different functional units or departments each with its own management and staff charged with a different task. Coordination within the organization is then done from the highest level with each department following a hierarchical reporting avenue leading up to the Chief Executive Officer overseeing and coordinating the entire organization’s operations.

Divisional Structure

A divisional structure divides up the organization and its operations into different functional units complete with their own resources and structures so as to function as an independent sub-unit of the overall organization (Carpenter et al., 2010). Divisions are created on the different basis such as geographically, products, services etc. In this case then, each division operates as a smaller decentralized federation or an independent organization on itsown while remaining under the umbrella of the parent company (Bartlett & Beamish 2010). The parent company only acts as an overall guide in strategic matters.

Matrix Organization

Matrix structures attempt to combine both functional and divisional structures to take advantage of the strengths of each structure (Carpenter et. al., 2010). Here then, the organization is divided up into different functions and divisions however coordination and cooperation occurring at many different levels so as to enhance effectiveness and efficiency of the entire organization. The organization is on most occasions divided into different teams working on different projects; however there is usually a lot of communication and coordination between them. Such an organization therefore appears to be a Coordinated Federation as is discussed in Bartlett & Beamish (2010)

Nike’s Organizational Structure

While having its operations in many regions spread out across the globe, Nike Inc. has sought to achieve operational and marketing efficiencies through a Matrix organizational structure (Hughes, 2008). Due to the wide range of operations and products the company has to offer, efficiency in such a circumstance can best be achieved through Coordinated Federation (Bartlett & Beamish, 2010). The company has spread its operations to the different regions which operate as independent units of the parent company and as well has spread out its resources in the same regard; however these are controlled from its headquarters in Beaverton, Oregon. The same applies to its technology and learning systems which are as well decentralized but as well work in a collaborative effort to be shared amongst its numerous divisions through its headquarters and even in more instances collaborating between themselves.

Nike as a corporation has a decentralized organizational characteristic; however, it seeks to implement a different structure within its various international locations. For example, in China, Nike management implements a more centralized federation with regards to its administrative heritage and strategy. As Christopher Bartlett and Paul Beamish explained in Transnational Management: Test, cases, and Readings, a centralized organization has a decision-making system located at a focal point within the organization. Lower management personnel have zero to no say in decision making. This implies that decision making in Nike’s campus in China is generated by corporate management.
Nike’s Transnational Transition

From its inception in 1968 through to its current status as a global leader in the design and marketing of sporting equipment, apparel and accessories, Nike Inc. has transformed from a small local distributor into a multinational corporation and now moving on to adopt a transnational model so as to achieve efficiencies and remain competitive within the market. The company in its globalized operations has had to be responsive to different market needs and environmental circumstances without having to rely heavily on its headquarters for direction (Hughes, 2008). Many of its international and divisional operations do not have to rely on the headquarters for such guidance; instead they work with independent teams to complete their tasks.

Learning at the same time is achieved in this transnational status such that through the coordinated efforts, the company is able to share the technologies across the different divisions and international operations without a hindrance caused by bureaucratic processes (Bartlett & Beamish, 2010). This is usually a joint or collaborative effort that enables standardization of quality as well as a reduction of costs resulting in efficiency and reduced replication of effort across the different divisions or areas of operation. In the core of all these efforts is the consideration of Nike’s strategic capabilities and objectives.

RELEVANCE

Strategic Capabilities

Nike Inc. has been through the three different strategic phases Bartlett and Beamish explained in Transnational Management: Texts, Cases, Readings in Cross-Border Management(2010). The company went through the international strategy where it was a distributor for the Japanese company, then moved on to the multinational phases were its management coordinated its products to local markets, for example developing and marketing soccer cleats in regions were the sport was more dominant, and finally moved to the global strategic phase.

Nike being a multinational company has evolved since its inception in Oregon, USA. It is on the brink of becoming a transnational corporation. By being a transnational corporation, Nike can leverage the core capabilities of its different subsidiaries that operate in different parts of the world, “we have powerful competitive advantages in our portfolio – innovative and compelling products, brands that are distinct and relevant to their consumers, and the world’s greatest athletes and teams. Our focus is to build, fuel, and, accelerate the power of our portfolio” said Nike Inc. CEO and President Mark Parker.

The way forward for Nike in achieving its goal of becoming a transnational corporation is to perform certain strategic moves. Nike’s selling point has always been one of differentiation and that has been its number one goal since inception. By differentiating itself from its competitors, Nike has been able to remain in the forefront of the sport apparel industry even amidst controversies of sweatshops and utilizing child labor. Nike has marched on and has expanded into other markets to test the waters and has been successful in the acquisitions of companies in other industries.

By acquiring UMBRO, Nike has expanded its lead as the number one football (soccer) company in the world. Such an acquisition is a strategic move on Nike’s part to remain competitive and leverage the core capability of its once rival UMBRO since it was acquired and included in the Nike portfolio. Also by acquiring companies like Cole Haan, a company that designs and markets luxury shoes, handbags, coats and accessories, Nike Inc. has been able to strategically enter new markets in order to be ahead of its competitors like Reebok and Adidas.

Furthermore, running a company with multiple subsidiaries efficiently in order to generate profit can be hectic, so Nike Inc. restructured its organization to have a flatter structure where you have less vertical layers of management. This helps reduce the level of management layers that a supervisor has to report to. Nike is in a business of constant change and adopting the transnational strategy will help them provide local responsiveness while learning to leverage the core capabilities of the different subsidiaries across the entire firm.

Another strategic move Nike has made in its quest to become a transnational company is its plans to expand its growth in Greater China, Central and Eastern Europe and emerging markets. Nike plans to do so by opening 250-300 Nike stores worldwide in order to market directly to the consumer over the next five years. According to NIKE, Inc. Introduces 2015 Global Growth Strategy, May 2010, “To build and strengthen its global retail presence, NIKE, Inc. announced plans to invest $500-600 million in capital over the next five years to develop the Direct to Consumer business and build capabilities to support both owned and wholesale retail productivity and performance.” By focusing on the Direct to Consumer strategy Nike can expect growth in their company over the next five fiscal years. Also, Nike plans to build a centralized campus in Shanghai China in attempts to further support its long-term business growth strategy in China. The Vice-President and General Manager of Nike’s Greater China region stated “This new campus headquarters will allow us to elevate and expand our capabilities while bringing all of our Shanghai based employees together from our portfolio of Nike, Inc. Brands into one central campus.” In Fiscal year 2011, Nike reported a 35% increase in the revenue for this geographic location which predicts increase in revenue for years to come.

A careful review of Nike’s 2010 strategy reveals that its key sustainability strategy at the beginning of the year was innovation, collaboration, transparency, and advocacy. Nike’s management stated that it sought to innovate to deliver enterprise-level sustainability by developing products that use the closed-loop products using the fewest possible materials with the intention of creating industry-wide scale, to integrate sustainability into the heart of its current business model by requiring that all employees share and incorporate the common understanding the organization’s corporate responsibility challenges, and to have new forms of collaboration, more platforms for production, advocacy for key policies that will enable scale, and consumer engagement in tackling environmental and social issues. By having such basis for sustainability, Nike not only seeks to improve its business operations, it also seeks to be the industry’s production practice benchmark. With this being an integral part of its corporate strategy, it is safe to say that Nike will gain competitive advantage in regards to corporate responsiveness. Nike has pledged to follow these strategies and has continued to do so until today.
Strategic Failures and Successes Fundamentally, the management and sometimes Board of Directors collude to map out a corporation’s plan of action, guidelines, and operational practices needed to effectively accomplish a major mission or aim at any given time. These plans, guidelines, and practices, commonly referred to as strategies, are created and expressed to employees and investors with the hopes that implementation would lead to an efficient business operation, an increase in product production and availability, and ultimately an increase in profit. Considering the tremendous impacts of environmental, social, economic, and political issues, it is impossible for management to accurately determine that these strategies will always lead to a path of successfully achieving business objectives; which implies that strategic successes and failures will occur.

Nike Inc. has had its share of strategic failures and successes over the years since its inception in 1968. The strategies aforementioned will be assessed and categorized as failures or successes based on their impacts on Nike’s portfolio and profitability upon implementation.

Differentiation Strategy

Nike’s initial strategy of differentiating itself and its products within the industry continues to remain at the forefront of its growth strategy. Since 1967, Nike has been known as a company that provides products that are not only useful to “serious athletes” but general day-to-day average Joes. From providing shoes and sports accessories to athletes in action sports, athletic training, basketball, football (soccer), running, tennis, and golf to creating shoes and products for cyclists, hikers, and working citizens, Nike has made itself a leader in the athletic products industry. Since 2000, Nike has undergone differentiation by means of segmentation with products like Nike Free, Nike Sphere, Nike iD, Nike Women, and Nike 6.0 among others. By taking a look at its financial statement from 2009-2012 it is safe to say that the differentiation strategy has been nothing short of successful in increasing Nike’s market share and profit.

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Fig. 1
Source: http://www.mergentonline.com.proxy-ms.researchport.umd.edu/companyfinancials.php?pagetype=ratios&compnumber=16861

From 2009 through 2012 Nike Inc. experienced a 25.82% increase in revenues and a 21.70% increase in profits. These increases can be attributed to aggregate sale performance the various products within Nike’s differentiated brand portfolios. Among its competitors, Adidas, Deckers Outdoor Corp, Crocs Inc, Bakers Footwear Group, and PC Group, Nike is leading in revenues, net income and market capitalization. Financial ratios also prove that the differentiation strategy continues to serve Nike well. As shown in Fig 2., all financial ratios have increased from 2009 to 2012. ROA-measures how well management utilizes its assets to generate income, and ROE- used to measure how effectively shareholder’s investments are used to generate profits, have both been increasing at a steady rate. In 2010 there was a drastic increase in the ratios; this could also be attributable to Nike’s 2010 decision to include a sustainability strategy in its growth strategy.

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Fig. 2
Source: http://www.mergentonline.com.proxy-ms.researchport.umd.edu/competitors.php?compnumber=16861
Sustainability Strategy In the words of CFO Don Blair, Nike’s sustainability strategy was implemented years ago with the attempt to evolve its corporate responsibility from “focusing on risk management, philanthropy and compliance to one that utilizes our natural focus on innovation to transition NIKE, Inc. into a business that is more sustainable, by which we mean that it brings people, planet, and profits into balance for lasting success.” Nike sought to implement a closed-loop model that would include design of products that can be manufactured using materials reclaimed at the end of a product’s life. By using this model, Nike reduces waste in form of recycling and reusing which reduces the amount of capital that would have been otherwise used to purchase brand new materials, hence improving profitability. The company also sought to include its consumers in tackling environmental and social issues within their respective geographic locations; it hoped to mobilize key constituents to partner in scaling solutions (Shift to Sustainable Business and Innovation). Since its implementation, this strategy has been successful by creating means and providing funds to citizens in need of both financial and moral support. For example, “Nike’s global collection of LIVESTRONG products helped the Lance Armstrong Foundation raise more than $100 million in the fight against cancer.” (Nike Inc, Sustainability report) According to Nike, this initiative is one of its most successful initiatives and has helped up to 28 million citizens around the world with cancer. Also, Nike developed a digital global giving initiative it deemed “Nike Game Changers,” in which young people within geographic locations are engaged and empowered to join Nike in combating environmental issues. For example, consumers around the world can donate towards helping improve lives of youth with disabilities in Kenya. By allowing consumers to take part in its sustainability plan, Nike creates a personal rapport with its consumers; they develop a sense of pride as a result of involvement in further helping their favorite company gain understanding of environmental issues. These consumers in turn become loyal to the Nike brand; therefore, promising a continuous sale volume in business within those geographic locations.
Acquisition Strategy As aforementioned, Nike acquired a few iconic footwear and sport apparel corporations among which are Cole Haan and Umbro, and added them to its brand portfolio. As a part of its growth strategy in 1998, Nike Inc. decided to acquire upscale footwear company Cole Haan to leverage its presence within the footwear industry gaining the attention of high-end consumers. On its own, Cole Haan generated $518 million in sales for fiscal year 2011. For over 10years, Cole Haan has been a subsidiary of Nike Inc.; its presence in Nike’s portfolio gave Nike the ability to create products with “craftsmanship, design and innovation, and distinctive character and style.” 10 years after adding Cole Haan to its brand portfolio, Nike went ahead to acquire English football footwear, apparel, and equipment producer Umbro, causing it to gain market share within the global footwear, apparel, and equipment market. Umbro along with Nike’s other wholly-owned subsidiaries contributed $2.7 billion of the company’s $20.9 billion in revenue for fiscal year 2011. According to Nike Inc.’s website, Umbro realized $224 million in sales for fiscal year 2011. Based on the information presented, it would be valid to assume that Nike’s growth strategy to acquire Cole Haan and Umbro was a successful strategy since its profits have been increasing following the acquisitions; however, looking into its future, Nike sees more promising opportunities for productivity and profitability. Just earlier in 2012 Nike announced the divestiture of Cole Haan and Umbro later in the year and in 2013. Divestiture of these organizations implies that Nike’s growth strategies are evolving, turning its focus more to its own core brands as expressed by CEO Mark Parker, “the decision to divest of Cole Haan allows us to sharpen our focus on opportunities with the highest potential for strong returns and to make sure the brands within the NIKE, Inc. portfolio are the most complementary to the NIKE Brand.”(Nike Inc. announces sale of Cole Haan, 2012) Mr. Parker also said of Umbro “{it} has a great heritage, but ultimately, as our category strategy has evolved, we believe Nike Football can serve the needs of footballers both on and off the pitch.” (Nike Inc. announces sale of Umbro, 2012) Although Nike has ultimately decided to divest of these two corporations, it would be unmerited to conclude that this acquisition strategy was a failure. The initial decision to acquire each corporation was a successful strategy seeing as Nike’s revenue and return on shareholders’ investments increased steadily, For example, ROE increased from 12.45% in 1998 to 13.69% in 1999 and Net profit remained steady following the acquisition of Cole Haan. Also Nike’s Net Income increased by $300,000 following the acquisition of Umbro in 2008.
Expansion/global growth strategy On May 5th, 2010, Nike Inc. announced its strategies and initiatives to achieve sustainable, long-term growth across its global portfolio of brands and businesses. According to the press release, Nike Inc. introduces 2015 Global growth strategy, the Company believes it can generate over $12 billion of cumulative free cash flow from operations through 2015. Both goals extend NIKE, Inc.’s long-term financial model of high single-digit revenue growth, mid-teens earnings per share growth, and expanding returns on capital. CEO Mark Parker mentioned that Nike had never been more inspired, innovative, and aligned with achieving its goals; he was confident that Nike had a large portion of competitive advantage in its portfolio, which is valid since there is a variety of products and brands available. With Nike Brand holding the largest portion of its portfolio, Nike has decided to maximize the opportunity to expand geographically; Nike announced that it will grow the Nike Brand in all of its six geographies and invest heavily in developing nations such as Greater China and Central and Eastern Europe targeting low double-digit growth and an additional $3.0-3.5 billion of annual revenue by the end of fiscal 2015. One way Nike plans to expand in its global geographies is by building a centralized campus in Shanghai China. Referring to the information provided above, the new campus headquarters will allow Nike to elevate and expand its capabilities while bringing all of its Shanghai based employees together from our portfolio of Nike, Inc. Brands into one central campus. In Fiscal year 2011, Nike reported a 35% increase in the revenue in Greater China which predicts increase in revenue for years to come. With Greater China being one of Nike’s developing markets, Nike has a great profitable future ahead. As stated by Dominic Wilson stated in A progress report on the Building of the BRICS, “the BRICS have made some progress in improving the generally weak state of their infrastructure in recent years.” According to Wilson, China and India have experienced the fastest infrastructure growth rates nearly across the board. Goldman Sachs conducted a research and estimated that China’s Real GDP will be 9.2% by the end of 2012; therefore, there is an economic fertile ground ahead for large corporations. With that being said, Nike’s decision to expand into the developing economy in Greater China can be categorized as a successful on-going strategy.
CONCLUSION/IMPLICATION
Is Nike Inc. Transitioning? As the business world moves toward transnationality, it would be delinquent for management of major corporations to remain in the mode of being a multinational corporation and ignore the vast amount opportunities ahead. The decision Nike made to divest Cole Haan and Umbro, two of its most productive subsidiaries shows that Nike is actively assessing its current organizational structure and is redeveloping its strategic tasks. Bartlett and Beamish explained that companies seeking to respond to the strategic challenges of becoming transnational must focus on defending their dominance while also building new sources of advantage. They also suggest that the configuration of assets and capabilities be “dispersed, interdependent, and specialized.” (Bartlett and Beamish, pg. 219) There are four different postures most multinational enterprises must face in response to becoming transnational; Bartlett and Beamish explained them as “archetypical responses along a spectrum of possible action,” which could also be referred to as categories. These postures vary from the exploitive state to the transformative state. Assessing the analysis of Nike Inc.’s current structure and strategic capabilities, it is easy to conclude that the company is in the transactional stage. Bartlett and Beamish believe that MNEs in the transactional stage avoid missteps with its consumers and are sensitive to not promote socially or economically unsuitable products with very different needs or markets with very different characteristics. Nike’s decision to include its consumers in its sustainability strategy and its product design implies that it is in the process of transitioning to become transnational. Having these characteristics and strategies in its framework, Nike heads towards a promising horizon.

References:

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