Question

What prevents Nike's subcontractors from entering the U.S. market to compete with them?

Answer 1

As Nike being a highest market share holder and because of the same Nike prevents others to into their proximity

Detailed analysis given below

Opportunities
Growth in Emerging markets
Industry barriers to entry exist in footwear
With the lifting of apparel quotas in the United States, companies should see improved margins in the United States as they move manufacturing offshore
Outsourced production creates lean corporate structures
Industry growing more quickly than GDP rates in most regions
Challenges
Retail Consolidation – will affect the apparel industry (more fragmented) more than the footwear industry (very concentrated and powerful brands (less imitable)
Competition has intensified – Adidas acquisition of Reebok forms a strong competitor, many smaller companies growing rapidly
The activewear market is getting crowded – Nike, Adidas, Reebok, and Puma are all trying to branch out from the primary athletic wear consumer to an activewear or lifestyle consumer creating intense competition
Possible slowdown of consumer spending in the U.S. and Europe
Higher energy prices, weakening consumer sentiment, and rising interest rates
NIKE Marketing Strategy
Nike’s strength of its product pipeline, brand portfolio and global reach has made it the clear leader in sports performance, making it #1 or #2 in 89% of the top markets.
Nike’s principal business activity is the design, development and worldwide marketing of high quality footwear, apparel, equipment, and accessory products. It is distributed in over 160 countries around the world. Sells under the NIKE brand, wholly owned subsidiaries Converse, Cole Haan, Hurley International , BAUER NIKE Hockey, and Exeter brands
Nike’s Marketing Mix
Nike’s marketing strategy is an important component of the company’s success. Nike is positioned as a premium-brand, selling well-designed and expensive products. Nike lures customers with a marketing strategy centering on a brand image which is attained by distinctive logo and the advertising slogan: “Just do it”. Nike promotes its products by sponsorship agreements with celebrity athletes, professional teams and college athletic teams. Nike has been developing its marketing mix consisting of the four P’s i.e. product, price, place and promotion. Thus Nike has soughed out the mix that will best help it achieve its goals of maximum profitability.
Product:
Nike takes into consideration various aspects of its products as it is in a product or consumer market. Thus it needs to have extensive range of products to withstand its competition. Nike provides features, designs, various brands, packaging along with some extra features like warranties and after sales service. This all aspects can be included in the product analysis. Nike has various products as well as brands that cater to different market segments which varies according to requirement of particular segments as well as individuals. Also they offer customized designs of their products wherein customer designs their product as per their requirements. Nike provides customization of their shoe range on their site Nike.com.Nike also offers a one year warranty for their products. Also they provide an option for replacement in all their products if any defects or problems occur after purchase which is a part of after sales service. Nike has been designing world class shoes for over 5 decades. Yet it has a tendency of changing the designs and patterns after a particular period or quantity. It also has a range of classic Nike shoes which are available all the time. Nike also provides packaging with collaboration with other brands.
Eg. Selling i-pods with their jogging shoes range
Price:
Nike has a high-end consumer market with high disposable income asking for better service and satisfaction as their target market. Thus their pricing strategy is to provide value at high cost with maximum profitability. Thus they have high margins but this can be justifiable due to its advertising and research costs. Nike also provides with discounts during various festive seasons on its products like Diwali in India. This is also a part of its pricing decisions.
Place:
Nike is a multi-national organization. Thus it needs to develop a wide range of distribution channel which can support its retail business. Thus Nike has some of the following distribution outlets .Retail: Nike sells through its retail stores, brand outlets, exclusive showrooms as well as hyper markets in metropolitan areas. Online shopping: Nike also provides with online shopping facility for its various products and services. Distributors: Nike has a wide coverage of its distributors across the globe to support its retail outlets. Factory outlets: Nike also sells its merchandise through factory outlets that sell some of its products at a discounted rate.
Promotion:
Nike is extensively involved in Promotion and advertising. Nike uses advertising, sales promotion, advertisement campaigns, public relations and publicity and sales offers to build awareness and brand image and loyalty. Nike endorses various celebrities such as athletes, football players, cricketers, tennis etc .It places its products in various movies and shows using product placement. Nike also sponsors various events such as tour de France, FIFA World Cup, Delhi Marathon and various others. Nike promotes its products also utilizing other products brand equity such as promoting its range of shoes along with I-pod. The “Just-do-it” campaign of Nike has been since nearly 3 decades and has got them worldwide fame. Nike also advertises by using various celebs in their advertisements to increase brand loyalty while utilizing the brand image of such celebs.Nike has also gone to the extent of sponsoring a stadium called “the Alliance Arena”, which is by far the biggest football ground in the whole world. Eg. Roger Federer, Tiger Woods, Ronaldinho, Ronaldo. Nike also endorses various teams as well as clubs such as Barcelona Football Club. Designed to make a connection to the consumer
Advertisement Strategies
Seldom pitch the product directly or talk about product attributes
Sometimes don’t even mention the company’s name, featuring instead only the swoosh logo
Seek to portray the core values of sport
Collaboration ads with another strong branded product, such as Apple iPod
Branding: powerful marketing mechanism used by Nike
• Leads to higher and more consistent product quality.
• Increases innovation by giving producers an incentive to look for more new features that can be safeguarded by the patent.
• Branding results in more product variety and choice for consumers.
• Branding provides consumer information about products and where to find them.
Michael Jordan
Put Nike on the map
1984-1985 Nike saw a decrease in their earnings for the first time ever
Influenced them to make their first specialty basketball shoe
Since then, Michael and Nike together have generated billions of dollars in revenue
“World Sports Hero No. 1”
Jump man logo is one of the most easily recognized symbols throughout the world
Tiger Woods
The newest Nike sensation
Estimated that Nike paid him $40 million
More attention than Michael Jordan and Bo Jackson
3 pg. ad in Wall Street Journal
30- and 60- second TV spots
Sales & Distribution
In the U.S., Nike operates 3 distribution centers for footwear. Internationally, Nike operates 21 distribution centers in Europe, Asia, Australia, Latin America, Africa and Canada. Nike’s sales force is divided into footwear and apparel and the teams are assigned specifically to accounts. Nike’s sales force is the most professional and has the greatest knowledge of the products compared to its competitors. Globally, if Nike is in an emerging market, or a new market, it distributes its product through a third party. However, as the company gains critical mass in that particular area of the world, Nike works to go in directly and eliminate the distributor level.
Manufacturing
Majority of Nike’s footwear and apparel products are manufactured by independent contractors outside the U.S., while equipment products are produced both in the U.S. and abroad. Fully 98% of Nike’s footwear is manufactured outside the U.S. Nike has 42 factories in Asia (China 36%, Vietnam 26%, Indonesia 22%, and Thailand 15%) that manufacture its footwear products; however, they are not all exclusive Nike product factories. In the non-exclusive factories, the company’s more basic sneakers are manufactured, while the more technologically advanced product is generally manufactured in the exclusive factories. Nike also has about 400 factories around the world that manufacture apparel, with the largest percentage of apparel manufacturing coming out of Asia, the Middle East, Turkey, Israel, and Mexico.
Financially, Nike’s overall results have improved over the years through both organic (core brands) and inorganic growth (acquisitions), supply chain initiatives and increased penetration in Europe and Asia. Nike has shown a 3 year CAGR of 11.8% since 2003. In 2006, revenues grew by 9% led by strong growth in Americas and U.S., while Europe and Japan have shown flattish growth. Currency had a negative effect of 1% on the total growth. Nike’s performance in 2006 was fueled by solid revenue growth across the different dimensions of the business – each of the geographic regions and each of the product business units posted higher sales for the year. Nike struggled in Europe but improved sales in the fourth quarter as a result of the world cup. Exchange rates too affected the International sales growth negatively. Net Income margin has also been improving over the years
While the core brands have shown good growth, the subsidiaries, through various acquisitions, have been responsible for a quarter of the total growth in the past three years and are expected to be the future drivers of growth. Nike branded footwear is the largest component of overall Nike sales. However, this business is becoming a smaller portion of the company’s portfolio. In fiscal 2001, Nike footwear comprised around 59% of sales compared to 53% at the end of fiscal 2006. Nike could further enhance its “other business/subsidiaries” through various small acquisitions
Sales by business Unit, 2001
Sales by Business Unit, ($ Billions) 2003-2006
*The segment labeled “Subsidiaries” or “Others” represents revenues from NIKE Golf, Cole Haan Holdings, Inc. and Bauer NIKE Hockey, Inc. for fiscal year 2001, and also includes Hurley International LLC, Converse Inc. and Exeter Brands Group LLC for fiscal year 2005. The subsidiaries sales are not reported geographically and hence are included under a separate segment (1) All growth rates include currency impacts
BUSINESS STRATEGY
Nike’s main priorities are to improve brand strength globally, improve trajectory in Europe & Japan, and experience growth from multiple perspectives: by category, price point, geography & channel
Nike’s strategy for building a profitable portfolio is focused in the following key areas:
Continuing to invest in the core business through innovation and demand creation.
Broadening its brand portfolio – Leverage multiple brands to pursue opportunities in all markets, distribution channels and at broader price points
Focusing on financial discipline – Making supply chain a competitive advantage, through operational discipline and excellence
Improve performance in Europe & Japan
Europe – UK and France need further work in the difficult athletic footwear and apparel industry. Football (soccer) is at the core of sports in Europe and is the key to success in that market. Even broader opportunities exist globally. Nike has made steady gains in football, in Europe through steady product innovation and effective demand creation initiatives and is now the leader
Japan – Reorganized management, increased demand creation, redesigned products to add value at select price points
Accelerate growth in developing markets
Nike will focus on growing its brands in underdeveloped countries such as China, India, Thailand, Indonesia, Mexico, and Brazil. While the company may be underdeveloped in countries, the opportunity has not been preempted.
Nike is focused on keeping its talent growth in line with its revenue growth
Women’s Fitness
Estimated market – $14.5 billion, growing at 5%-8% per year
% of Women’s products in Nike sales – 18% of the total branded business
Nike is developing product specifically for women, around four core sport categories: running/walking, yoga, cardio and fitness dance – major competitive advantage. Results have been strong – 19% revenue growth in FY05
China – Biggest growth market – population of 1.3 billion people, over 400 million youths (5x the number of youths in the U.S. )
Revenue doubled in 2006, second largest market in Asia, behind Japan
Nike faces intense competition from Adidas, and Li-Ning
Nike’s retail presence – over 2,000 point of sale locations currently and will continue to grow
Other under penetrated emerging markets like India, Thailand, Indonesia, Mexico and Brazil
Other Brands To Become Increasing Mix Of Revenues
Nike has built a diverse portfolio of other brands including Converse, Starter and Cole Hann among others to address market opportunities not appropriate for the Nike brand
Potential to become 25% of total revenues, up from 13% currently
By executing these strategies, Nike aims to deliver the following long-term financial goals
High single digit revenue growth;
Mid-teens earnings per share growth;
Increased return on invested capital and accelerated cash flows; and
Consistent results through effective management of diversified portfolio of businesses
Profitability gains, through gross margins expansion irrespective of FX movements, augmented by a new focus on SG&A leverage.
BUSINESS COMPETITION
Nike’s main competitor is Adidas which, after the acquisition of Reebok, has become the closest competitor in terms of revenues and market share
Adidas AG – The Group’s principal activities are producing and marketing of sports goods. The Group markets its products under the brand names: Adidas, Salomon TaylorMade-Adidas, Mavic and Bonfire. Products sold under the brand name Adidas include footwear, apparel, and sport accessories such as bags and balls. The Group has operations in Europe, North America, Asia and Latin America. At 31-Jan-2006 the Group acquired Reebok International Ltd & remaining interest of Taylor Made Golf Company. During the year the Group disposed Salomon business segment. Revenues for the company in 2005 were $7.8 billion and net income of $503 million
Puma, another German based company, whose revenues though small, has shown tremendous growth in the past few years and is a big player in the Europe market is expected to provide competition
Puma – The Group’s principal activity is to design, manufacture and market sporting goods. The Group’s activities are carried out through three divisions: Footwear, Apparel and Accessories. Footwear division design, manufacture and market sports shoes. Apparel division includes track suits, football strips and similar sportswear. Accessories include sports luggage, footballs and gloves. The Group has operations in Europe, Asia, America and Africa. The Group sold Tretorn Sports Sales Ltd on 1 July, 2005. Puma had sales of $2.1 billion in 2005 and net income of $337 million
In athletic apparel and footwear, there are two truly global players – Nike, Adidas/Reebok – with a host of ‘second tier’ competitors including Puma.Competitive Landscape – Nike is the best positioned athletic company in the marketplace (Ratings – 3 being the highest and 0 being the lowest)
SWOT Analysis -Nike
Strengths
Contracts with Universities: Nike has contracts with universities nationwide to supply apparel for athletes. These university sponsorships are beneficial to Nike because they give the company the right to sell merchandise with these schools’ logos, tap into the market of collegiate sports apparel, and form relationships with young consumers.
Analyst Confidence in Stock: According to press releases issued by Bloomberg, analysts from Bank of America, CSFB, and Wells Fargo recently called Nike a “buy.” After a lackluster financial year, this news could potentially affect stock price in a positive way.
Michael Jordan Returns to Basketball: Nike received press coverage throughout Jordan’s decision-making process and continues to make press regarding the impact of Jordan’s return. Nike was able to capitalize on this strength by debuting a new shoe – the Air Jordan XVI – and by making new commercials with Jordan that will hit the airwaves soon. Michael Jordan is perhaps the most recognized athlete in the world and markets Air Jordan apparel for Nike.
Corporate Responsibility Report: According to the Nike Web site, in October Nike released its first Corporate Responsibility Report. The document states that Nike’s focus points, in terms of corporate responsibility, are the environment and labor. Since these are two areas that cause protests against Nike, it is important for Nike to label them as areas to focus on and for Nike to give the public this information.
Strict Environmental Standards: According to Bloomberg, Nike has accepted strict environmental standards to comply with by 2005. These standards were part of the Kyoto treaty that President Bush refused to sign and are supposed to help in the fight against global warming. Nike has made other efforts to be energy efficient; its office in the Netherlands is the most energy efficient office in that country by 35%. Nike also uses organically grown cotton, promotes the Eco-class program with Delta Airlines, and founded N.E.A.T. in 1993 to, as the Nike Web site maintains, “Reduce Nike’s impact on the planet.”
Philanthropy: Nike is committed to philanthropic endeavors such as “Reuse a Shoe,” “Project Dreams” and “Habitat for Humanity.” These efforts, along with other programs such as the “Shadow” program .