Nike (NASDAQ: NKE) is a leading brand of sports shoes, apparel, and equipment. Incorporated in 1967, under the laws of the State of Oregon, Nike is the largest seller of footwear and apparel globally. Apart from its branded retail stores, the company also sells its products online and through independent distributors. However, Nike does not make the products it sells. These products are made by independent contractors. Nearly, all the suppliers who make Nike shoes and apparel are located outside the United States. The U.S. is the leading market of Nike with the largest number of Nike branded retail stores. However, the company also has an impressive presence in the other corners of the world. Known for its focus on product quality and innovation, Nike spends heavily on research and design which is an important reason behind its leading position in the global market. Competition in the footwear industry has grown intense resulting in Nike growing its focus on research and development as well as marketing. However, a key reason behind the success of Nike is its unique business model and its core competencies. The company is enjoying growth in sales and revenue in recent years driven by its focus on innovation as well as changing consumer trends. Take a look at the business model of Nike and the main drivers of its revenue and profits.
Product Categories and Segment-wise Performance:
The Nike brand makes products in six key categories which include: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (its sports-inspired lifestyle products). The company also markets and sells products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, lacrosse, skateboarding, tennis, volleyball, wrestling, walking, and outdoor activities.
Athletic footwear products of Nike are designed mainly for athletic use. However, most of its products are worn casually or for leisure purposes. The main focus of the brand is on innovation and making high-quality products. Its top-selling footwear brands include the Running products, Jordan brand, and Sportswear which also account for the largest part of Nike’s revenue.
Nike’s revenue from the Running category has grown by 7% from 2017 to 2018 (5% on a currency-neutral basis). Nike’s wholesale equivalent revenue from ‘Running’ products grew to $5.2 billion in 2018 from $4.9 billion in 2017.
Revenue from the Jordan brand fell by around 8% (9% decline on a currency-neutral basis) in 2018 compared to 2017. Nike’s wholesale equivalent revenue from Jordan came down to $2.9 billion in 2018 from $3.1 billion in 2017. In the ‘Sportswear’ category, Nike’s revenue saw a growth of around 11% (8% on a currency-neutral basis) rising from $8.99 billion in 2017 to $10 billion in 2018. Sportswear category is the largest source of revenue for Nike followed by Running products, Training products and Jordan brand (based on revenue in FY2018).
Total Nike brand wholesale equivalent revenues grew by around 6% (4% on a currency-neutral basis), rising from $28,694 million in 2017 to $30,301 million in 2018.
The brand also sells a line of performance equipment and accessories under the NIKE brand name, including bags, socks, sports balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment made for sports activities. The company sells small amounts of various plastic products to other manufacturers through its wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. The Jordan brand makes and sells athletic and casual footwear, apparel and accessories in the basketball category using the Jumpman trademark.
Nike makes products for men, women as well as young athletes. Men’s products form the largest category followed by women’s and young athletes based upon the revenue they generate. In 2018, Nike’s revenue from Men’s products grew by around 7% (5% on a currency-neutral basis). Nike’s wholesale equivalent revenues from men’s products rose from $16,041 million in 2017 to $17,114 million in 2018. The company’s revenues from women’s products grew by around 4% (2% on a currency-neutral basis). Nike’s wholesale equivalent revenues from women’s products rose from $6,644 million in 2017 to $6,915 million in 2018. Nike’s revenues from products for young athletes grew by 1% (- 1% on a currency-neutral basis). Nike’s wholesale equivalent revenues from products for young athletes grew from $4,838 million to $4,906 million in 2018.
Nike does not make the products it markets and sells. The company has instead outsourced all the manufacturing to external suppliers. There are at least 124 footwear companies in 13 countries that make all the footwear that Nike sells. Several of these independent contractors which are located mostly outside the United States operate multiple factories. In 2018, the largest one of these factories accounted for around 9% of the total footwear production of Nike. Contract factories in Vietnam, China, and Indonesia manufactured $7%, 26% and 21% of Nike branded footwear respectively in 2018. Apart from these, the company has entered into manufacturing agreements with independent contract manufacturers in India, Argentia, Italy, Mexico and Brazil for manufacturing products for sale in the local markets. Nike mainly uses natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas for the production of its footwear. It also uses polyurethane films for making Nike Air-Sole cushioning components.
Nearly, all of the apparel that Nike sells is also manufactured by independent contractors located outside the United States. In 2018, around 328 apparel factories located in 37 countries supplied Nike with apparel. Contract factories in China, Vietnam, and Thailand produced approximately 26%, 18% and 10% of Nike branded apparel in 2018. The main materials that Nike uses for making apparel include natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. In this way, Nike has outsourced nearly all of its manufacturing and still retained heavy focus on quality and innovation. Despite the large supply chain and manufacturing network spread over several countries, the company has maintained the quality of products.
Sales and Marketing:
Competition has grown a lot in the footwear industry. Some of the leading competitors of Nike include Adidas and Under Armour. Apart from the competition, there are other factors too that affect the popularity and demand of its products. Changing design trends, relative popularity of various sports activities, as well as seasonal trends, also affect the demand of these products. Nike has brought a varied product mix. However, to respond to the changing trends, it must also make adjustments to its product mix from time to time. Releasing new products regularly as well as extensive marketing is also essential to maintain the demand for Nike products. If the company is unable to respond to the changing trends, there will be an adverse impact on the demand of its products and the company’s profitability. The company employs several channels for the marketing of its brand and products. Apart from its physical and online sales channels, the company uses digital advertising and social media promotions for brand awareness and demand creation. Every year the company invests a large sum in advertising and promotions. In 2018, its total demand creation (marketing) expenses reached $3.6 billion compared to $3.34 billion in 2017. There was an overall 7% increase in the total marketing expenses of Nike from 2017 to 2018. Demand creation expenses of Nike include its advertising and promotion costs, including costs of endorsement contracts, complementary product, television, digital and print advertising and media costs, brand events and retail brand presentation.
Nike also has an extensive global sales network. The United States is its largest market and therefore has the highest number of physical stores. In 2018, the number of Nike brand retail stores in the United States was 392 and 790 in the international markets. The number of total Nike brand retail stores globally rose to 1,182 in 2018 from 1,142 last year. The brand also sells its products from Nike and Converse brand owned e-commerce platforms in more than 45 countries.
Leading Markets :
On a geographical basis, the business of Nike is divided into four main divisions which include North America, EMEA (Europe, Middle East, and Africa), Greater China and APLA (Asia Pacific Latin America). North America is the largest geographical market of Nike based on net revenue. In 2018, revenue from Nike brand products from North America declined by 2% (2% on a currency-neutral basis) from $15.22 billion in 2017 to $14.86 billion in 2017. Revenue from EMEA (Nike brand products) climbed 16% on the other hand, rising from $7.97 billion in 2017 to $9.42 billion in 2018. Revenue from Greater China also climbed by 21% in 2018 rising from $4.24 billion in 2017 to $5.13 billion in 2018. APLA (Asia-Pacific and Latin America) revenue of Nike increased by 9% from 2017 to 2018 rising from $4.74 billion in 2017 to $5.2 billion in 2018. The Converse brand is a separate reportable segment which saw its revenue fall by 8% in 2018 from $2 billion in 2017 to $1.9 billion in 2018.
A list of nations where Nike’s international branch offices are subsidiaries are located:
- Argentina, Australia, Austria,
- Belgium, Bermuda, Brazil,
- Canada, Chile, China, Croatia, the Czech Republic,
- Finland, France,
- Germany, Greece,
- Hong Kong, Hungary,
- India, Indonesia, Ireland, Israel, Italy,
- Macau, Malaysia, Mexico,
- the Netherlands, New Zealand, Norway,
- Panama, the Philippines, Poland, Portugal,
- Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland,
- Taiwan, Thailand, Turkey,
- the United Arab Emirates, the United Kingdom, Uruguay,
- and Vietnam.
Risks and challenges:
Not just in the United States, but in the international markets too, the athletic footwear, apparel, and equipment industry is marked by heavy competition. Internationally, the brand competes with a large number of sports and leisure footwear, apparel and sports equipment companies. Not just in terms of sales and marketing, but there is intense competition in manufacturing and supply chain as well. Since the number of suppliers for good quality raw materials is limited, large brands also compete for the best manufacturers. From their product offerings to marketing as well as digital presence and social media, the companies compete in all these areas fiercely. Intense competition in the industry also leads to higher expenditure on research and development as well as marketing.
Changing consumer trends:
The success of Nike to a large extent depends upon its ability to anticipate consumer demand and product trends in a timely manner. Responding rapidly to these changing trends may sometimes prove difficult because of product lead times. Changing consumer preferences may not be so easy to predict. So, it is not certain that every new product that Nike releases will gain the same acceptance and popularity. Nike needs to adjust its product mix from time to time in order to maintain its sales and profitability. Moreover, in the twenty-first century consumer preferences have changed faster than ever which also means higher risks related to sales and profits.
Need for a higher focus on innovation:
The commercial success of Nike products also depends upon technological innovation and quality control in the design and manufacturing process of footwear, apparel, and athletic equipment. Nike relies upon experts and specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability, and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other areas for designing and testing new products.
Economic conditions globally can also have a positive or negative effect on the sales of Nike products. The state of the global economy has a direct impact on the sales of international brands like Nike. The impact can be most acute in the fast-developing and emerging economies. Lower consumer spending can also result in lower sales, revenue, and gross margins. Moreover, economic fluctuations can also result in limited access to financing in credit and capital markets at reasonable rates. In this way, the state of the global economy also poses significant challenges and risks before Nike.
Other risks and challenges:
Apart from the above-outlined risks and challenges, there are several more risks and challenges in the global environment that affect the business of Nike and its sales and revenues from various geographic markets. The need for compliance has grown and the political environment in major markets, as well as trade regulations and tariffs, can also make business challenging for Nike. Other forms of risks like data security and privacy risks can also have a negative effect on the operations and reputation of Nike.
Analysis of Nike’s Operations Based on the 4Vs Model
Operations and operational processes are like the fundamental building blocks of organizations that decide the productivity of the organization and the quality of their output as well. Focusing on operational efficiency helps businesses find faster growth both domestically and internationally as well as maximize output. Many times, if the efficiency of processes is low then it is mainly because the company has adopted a poor operational design. Processes across business organizations and industries can differ significantly and that is why all processes need to be managed differently.
Some of the leading differences between various processes are due to the types of technologies and know-how involved. Different processes require different production equipment as well as different skills and know-how. However, apart from these things, the difference also lies in the nature of the demand for the products and services these processes produce. There are four particular characteristics of demand that have a significant impact on process management and which are as follows:
- The volume of the products and services produced
- Variety of products and services produced
- Variation in the demand for products and services.
- Degree of visibility that customers have of the production of products and services.
Volume of products and services:
Does the business being discussed produce a large amount of the same products and services or many items in small volumes? If the volume of output is high, it indicates repeatability or high-level familiarity of the process. Many times since a large business produces more and more of the same thing, it helps the business gain significant expertise in a particular area. The company may also acquire a significant competitive advantage compared to the smaller ones. Companies develop special technologies to create more of the same products and to gain production efficiency. When the volume of the product being produced is large, companies do not just gain production efficiency but the fixed costs being the same profits can be higher. On the other hand many times, companies make various products in smaller volumes which may require specialized technologies, as well as skills and know-how, and therefore the variable costs may grow for the business. Costs may also fluctuate heavily for the companies that make many types of products in smaller volumes.
Nike mainly makes and sells products in three categories that include shoes, apparel, and equipment. However, it is the largest brand of sports shoes. It is an innovative brand that creates products to help athletes improve their performance. Nike produces shoes and apparel in large volumes. The company makes a large range of sports shoes that appeal to a vast customer segment. However, while the raw material used in each style or design may differ, the technologies and know-how used for the production of these sports shoes is mostly similar. Overall, the company has managed its production and supply chain operations very well to gain maximum production efficiency.
Variety of Processes as well as products and services produced:
Variety denotes the various types of operational activities being performed by a company. The level of operational complexity can be higher in the case of the mixed model manufacturers that have to continuously switch between various processes. In that case, apart from a large range of inputs required for producing the output, the company would have to deal with the additional complexity of matching customer requirements to the products or services. The high variety processes are generally more costly as compared to the low variety processes. However, several businesses employ both high and low variety processes. Many times production of some major parts may require the use of low variety processes where each part goes through the same process before the final assembly. However, to produce some specific parts, the company may have to utilize high variety processes.
Nike also uses a mix of high and low variety processes for the production and sales of Nike products including shoes, apparel, and equipment. However, the main thing is that it has outsourced most of its production to external suppliers. This has helped the company reduce a lot of its operational burden. Having outsourced the production part to external suppliers, the company has reduced a lot of operational complexity and has t deal with mainly the marketing and sales process. However, the company develops various production technologies that help its suppliers produce innovative products. The company places a heavy focus on product quality and therefore sources only from reliable suppliers that can support its quality standards. However, when it comes to the variety of processes, the company does not need to switch between high and low variety processes since all the production is taken care of by the suppliers.
Variation in demand of products and services:
In fact, this is one of the most challenging aspects of business operations. It is easier for businesses to manage the processes when the level of demand is predictably constant. However, when demand can fluctuate significantly then managing processes becomes a lot more complex. If demand is predictably constant, it is easier to gear resources to efficiently cater to the existing demand, Moreover, businesses can plan operational activities including marketing and sales or after sales services in advance.
On the other hand, if the level of demand varies significantly or can be highly variable or even unpredictable, then resources will need to be adjusted over time. What is even worse is that if demand can soar unpredictably, extra resources need to be devoted to the process such that it provides a capacity cushion that can easily absorb the unexpected demand. Let’s take a simple example of seasonal variations in e-commerce. Demand for a large range of products surges suddenly during the festive season including gifts, electronics, home decor products as well as fashion products. Businesses like Amazon need to remain ready to cater to the fast surge in demand that happens during the festive season. However, apart from retail, it also applies to fashion since people shop for fashion products more during the holiday season.
In the case of Nike too, the company does not experience any major variations in demand throughout the year. Demand does not fluctuate severely for Nike products since sales of fashion products, shoes and apparel generally remains the same throughout the year. However, the demand may sometimes rise suddenly driven by a particular marketing campaign or due to the holiday season. In most such situations, the company remains ready for the rise in demand and to meet it utilizes both online and offline channels.
Visibility of processes:
This is also a rather complex aspect of business operations to grasp. It denotes that aspect of business operations that is easily visible to the customers. The businesses that work with consumers directly may have more visible processes. For example, the healthcare and retail industry have more visible processes. However, the same is not true about an automobile business. Customers generally do not have a very clear view of the production and distribution processes of automobile brands. They cannot peep into everything that goes on before the finalized cars reach the showrooms. This is the only aspect of automobile operations that they are generally familiar with. It is also true about businesses like Apple inc. However, when it comes to businesses like Amazon or even Facebook, these are highly customer-facing businesses or customers have very high visibility into their operations. These are also some businesses for which transparency and accountability matters a lot. Customer trust and business accountability have continued to gain significance in the modern era.
The most visible aspect of Nike’s business operations is its store operations and marketing operations. The production operations of the company are generally invisible to the customers. Nike undertakes both sales and marketing through its retail stores. However, the company is also using online sales channels for the sales and marketing of its products. As such its online retail operations are also among the most visible aspect of its business. Apart from well-designed stores, the company also focuses on providing an overall great customer experience since it has a direct impact on its overall influence in the industry.
Five Operational Performance Objectives
To run an organization, a well-defined set of operations performance objectives is essential. There are five basic performance objectives applicable to all types of business operations. These five basic operations objectives include cost, dependability, flexibility, quality, and speed. There are both internal and external implications of these five performance objectives. Moreover, the internal effects of these performance objectives has a definite impact on cost.
This is the first leading operational performance objective. Your customer’s expectations are the best measure of your quality and quality denotes performing according to your customers’ expectations. Quality also has a direct and significant effect on customer satisfaction. However, what quality implies for business varies on the basis of the industry it operates in. For example, quality acquires a different meaning for an automobile business and for a technology business. The same quality standards will not apply to the two businesses. Quality can acquire different meanings in different settings or industry environments. While in some industries, staff friendliness and customer service are the main measures of quality, product quality, and performance might be the main indicator of quality for another. However, no matter whatever industry a business belongs to, customers appreciate quality is a fact. Quality bears a direct and major influence on not just customer satisfaction but also on organizational performance. Nevertheless, quality is also related to a company’s image and apart from making certain things easier for the business like customer acquisition, it can also increase an organization’s profitability. Moreover, given the level of competition in today’s industry environment, quality has become all more importance for businesses. Growth for any business is not possible without quality and compromising on the quality in most cases leads to loss of customers and financial performance. It is true about nearly every industry including the fashion and shoe industries.
If Nike is ahead of its rivals in the shoe industry, then it is mainly because the company focuses on producing good quality products. While the prices of Nike products are generally higher than the ones produced by its rivals, the company also offers better quality. Quality is directly related to brand image and consistent focus on quality has also helped the company achieve a stronger brand image. This has led to superior performance in the market and a larger customer base. However, the focus upon quality is not limited to only production and sales, but the company also focuses upon quality in its marketing operations since quality marketing helps acquire faster growth and acquire a stronger reputation. All this focus on quality has resulted in market leading position for the brand.
Speed has also become an important factor affecting organizational performance. The growth of digital technology has led to a higher focus on both speed and efficiency. The speed at which products and services are delivered has become an important factor that affects customers’ perception of a brand. Speed has become a central concern like product quality, prices, and operational efficiency for nearly every industry. A large range of services is being bought and consumed online. People order products including food products online and some companies like Domino’s have also used speed as a pillar of their marketing strategy. Not just in manufacturing or services industries but in the other industries too speed matters more than ever. It is because companies need to deliver their products or services to the consumers in a timely manner.
While speed may not be as important in the case of fashion businesses as technology businesses, it is still an important aspect of its business operations. There are various aspects of operations including manufacturing and supply chain where speed is important. It is an era of fast fashion and even established shoe and apparel brands are feeling challenged by the rise of the fast-fashion brands. It is why Nike as well as more rivals have focused on bringing more speed to their business processes so that ideas can be transformed into products and brought to the shelves faster. In this way, by speeding up things, Nike is able to increase its profitability apart from production efficiency. The same is true to some extent about marketing where the company has to focus on keeping its customers engaged so as to avoid losing market share. Speed is a sign of efficiency and agility is important not only for the automobile businesses but also for the other businesses whether in the tech industry or the fashion industry.
Dependability also implies reliability or trust that customers place in a business. Brand equity is a leading strength for any business and companies take it more seriously than anything else in order to find market growth. How dependable your business is or how much your customers trust your business decides your overall influence in the industry as well as the markets where your business operates. There are a large number of factors that affect reliability or dependability in each industry.
For example, it is the quality of the product and its efficiency that matters in one industry, in the other it is the product design apart from product quality as well as how well a company markets itself that affect dependability. Brands must only make promises that they can keep since if your product or services fall below their expectations, it will hurt your brand image and reduce your dependability. The kind of customer experience that you offer to your customers also affects your customer experience. especially, when a large number of products and services are being sold online and the level of human interaction between customers and sellers has reduced, customer experience has a significant and direct impact on the dependability of businesses. Moreover, the focus on dependability must also remain due to the fact that the level of competition in most industries is very high.
The shoe industry is also seeing intense competition. There are a few leading players that enjoy the highest market share in the entire industry. However, brand equity plays an important role in terms of marketing as well as the overall influence of a brand in the market. In the shoe industry, brand equity is affected by many factors including product quality, marketing strategy, as well as branding, and customer experience. Nike has used an impressive marketing strategy that connects the brand with millions of sports fans all over the world. The sports centered marketing strategy of Nike has helped it grow its influence in the market and build a strong and impressive market presence throughout the globe. Apart from that, it is due to the company’s focus on maintaining a clean image, and continuous innovation to bring market-leading products has also turned it into the most popular shoe brand throughout the world. Popularity is also a sign of dependability in the sports shoe and fashion industry. Brands that focus on product quality and customer experience are able to grow their popularity faster in the fashion industry. Nike’s product quality, market-leading innovation as well as marketing strategy have all helped the company achieve customers’ trust.
Flexibility means the ability to change what, how, and when operations do. There are four types of flexibility in general that are applicable to business operations. They include product/service flexibility, mix flexibility, volume flexibility, and delivery flexibility. Product/ service flexibility means the ability to introduce new or customized products or services. Mix flexibility means the ability to widen the product/services mix to cater to the customer needs better. Volume flexibility denotes the ability to change the output level to produce different quantities of products/services over time. Delivery flexibility on the other hand means the ability to change the timing of delivery. Overall, flexibility is an important aspect of operational performance and superior flexibility also denotes superior performance. Flexibility can also acquire different meanings in different industrial environments. For example, in a healthcare environment, the ability to introduce new types of treatment and to widen the range of available treatments or the ability to adjust more patients and reschedule appointments can all be a sign of flexibility. However, in the case of the automobile or retail industry or even fashion or shoe, flexibility can mean different things.
Flexibility is also a sign of adaptability in the modern era. Companies organize their business operations and value chain in a manner that helps them achieve higher efficiency and reduce costs. Nike has also managed its value chain in an excellent manner which has helped the company maximize productivity and the efficiency of its business processes. The company has outsourced nearly all its manufacturing operations which allows the company to operate the rest of its business processes flexibly. The pace of innovation at Nike also shows its flexibility of operations.
Costs in terms of operations performance mainly mean the operating expenses incurred by businesses. However, the proportion of various operating costs can vary from industry to industry. For example, staffing costs may represent the largest costs for a transportation company but the costs of raw material may be the largest group of operating costs for an automobile brand. In the case of most companies, if their operating expenses are low, they can also keep the prices low for their customers. Not all companies compete in the market on the basis of price. Some companies compete on product quality, other companies compete on the basis of customer service and others on the basis of marketing or all of these factors. However, even the companies that do not compete on the basis of prices, they too are interested in keeping their operational costs low. If a company reduces its operating expenses that will help it increase its profits because a penny saved equals a penny gained. The way in which operations need to be managed in order to keep operating expenses low requires focusing on areas where the company incurs the highest operating expenses.
The largest category of expenses for Nike is the cost of sales which equaled $21.2 billion in fiscal 2020 compared to $21.6 billion in 2019. Selling, general and administrative expenses are the major categories of costs incurred by Nike. The company also spends a large sum on marketing each year. Its marketing costs are included in the selling, general, and administrative expenses and equaled around $3.6 billion in 2019. However, managing costs helps companies like Nike manage and grow their profitability. Nike mainly sells high-quality products that sell at premium prices. However, despite that, it is important for the company to keep its operating costs low in order to maintain their sales and profits.
Nike is renowned for its quality, design, innovation, and marketing. The swoosh logo sets it apart from its competition and the crowd of brands in the sports and leisure market. In 2018, while the overall revenue of the brand saw impressive growth, the company has seen its financial performance improve consistently over the last five years. Net Revenue of Nike grew from $34.4 billion to $36.4 billion from 2017 to 2018. Its gross profit also improved from $15.3 billion to $15.96 billion during the same period. The main reasons behind the growth of the brand include its focus on research and innovation as well as marketing. It is investing heavily in both areas. However, the international market environment is full of risks and challenges. With growing competition, Nike also needs to retain its focus upon R&D, marketing and ready to adjust its product mix rapidly with changing consumer trends. Running, training and sportswear products remained its primary drivers of revenue in 2018. Nike has adopted a strong business model and despite having outsourced nearly 100% of its manufacturing, Nike has maintained an excellent level of quality. These factors have helped it maintain its leadership in an intensely competitive industry. In the near future, Nike plans to increase its focus on sustainable raw materials in order to grow its popularity, customer base and sales as well.