Case Study:

Nike's Core Competency: The Risky Business of Creating Heroes

DURING THE LAST DECADE, Nike's annual revenues doubled and by 2018 attained some $35 billion. With its globally recognized brand, Nike is the undisputed leader in the athletic shoe and apparel industry. Number two adidas has some $22 billion in sales, while recent entrant Under Armour reports revenues of $5 billion. Nike is tremendously successful, holding close to a 60 percent market share in running shoes and nearly a 90 percent market share in basketball shoes and apparel. Yet one of its greatest strengths can also be seen as one of its greatest vulnerabilities. Before we introduce that strength, it helps to know how Nike started.

Nike Co-founders:

Bill Bowerman and Phil Knight

The Beaverton, Oregon, company has come a long way from its humble beginnings. It was founded by University of Oregon track and field coach Bill Bowerman and middle-distance runner Phil Knight in 1964 and was first called Blue Ribbon Sports. In 1971, the company changed its name to Nike (Greek mythology's goddess of victory) with the now iconic "swoosh" designed by a Portland State University student.

BOWERMAN'S ROLE. Coach Bowerman was a true innovator because he constantly sought ways to give his athletes a competitive edge. He experimented with many factors affecting running performance, from different track surfaces to rehydration drinks. Bowerman's biggest focus, however, was on providing a better running shoe for his athletes. While sitting at the breakfast table one Sunday morning and absentmindedly looking at his waffle iron, Bowerman had an epiphany. He poured hot, liquid urethane into the waffle iron—ruining it in the process but coming up with the now famous waffle-type sole that not only provided better traction but was also lighter than traditional running shoes.

ENTER KNIGHT. After completing his undergraduate degree at the University of Oregon and serving in the U.S. Army, Phil Knight entered the MBA program at Stanford. One entrepreneurship class required him to come up with a business idea. He wrote a term paper on how to disrupt the leading athletic shoemaker, adidas. The research question he came up with was, "Can

Japanese sports shoes do to German sports shoes what Japanese cameras have done to German cameras?"

At that time, adidas athletic shoes were the gold standard. They were also expensive and hard to find in the United States. After several failed attempts to interest Japanese sneaker makers, Knight struck a distribution agreement with Tiger Shoes. After his first shipment arrived in the United States, Phil Knight sent some of the running shoes to his former coach, Bill Bowerman, hoping to make a sale. To his surprise,

Bowerman replied that he was interested in becoming a business partner and contributing his innovative ideas on how to improve running shoes, including the waffle design. With an investment of $500 each and a handshake, the venture commenced.

Creating Heroes

Nike had already reached a level of success by the late 1970s. Based on a highly successful string of innovations including Nike Air, by 1979 the company had captured more than a 50 percent market share for running shoes in the United States. A year later, Nike went public. Even so, the company had yet to establish one of its most effective marketing tactics.

In 1984, Nike signed Michael Jordan—still early in his career, before he was hailed by many as the greatest basketball player of all time—with an unprecedented multimillion-dollar endorsement deal. Rather than spreading its marketing budget more widely as was common in the sports industry at that time, Nike made the unorthodox move to spend basically its entire budget for a specific sport on a single star athlete. Nike sought to sponsor future superstars that embodied an unlikely success story. Michael Jordan did not make the varsity team as a junior in high school, and yet he became the greatest basketball player ever. Nike's Air Jordan basketball shoes are all-time classics that remain popular to this day.

In the 1990s and 2000s, Nike continued to sponsor track and field stars such as Marion Jones as well as Kobe Bryant in basketball. With the help of major celebrity endorsements, Nike was also able to move on to different sports and their superstars, including golf with Tiger Woods, cycling with Lance Armstrong, soccer with Wayne Rooney, and football with Michael Vick. If some of those names trigger memories of scandals as well as athletic achievements, you see the problems that Nike risks with its endorsement program. Before going into the negatives, let's examine the powerful message behind such endorsements.

Nike is less about running shoes or sports apparel than about unlocking human potential. This is captured in Nike's mission to bring inspiration and innovation to every athlete in the world (and if you have a body, you are an athlete). ² Nike uses its heroes to tell a story whose moral is that through sheer will, tenacity, and hard work, anyone can unlock the hero within and achieve amazing things. Nike will help everyone become a hero. Just Do It! This type of mythical brand image has allowed Nike to not only enter but also often

Oscar Pistorius (left) and Lance Armstrong (right), some of Nike's past celebrity endorsements.

dominate one sport after another, from running to ice hockey. It spends more than $1 billion a year sponsoring athletes. Nike picks athletes that succeeded against the odds—cancer survivor Lance Armstrong, double amputee "blade runner" Oscar Pistorius, and other athletes hailing from disadvantaged backgrounds.

Nike astutely focuses on its core competency in athlete sponsorship and design, while it outsources noncore activities such as manufacturing and much of retailing. To create heroes, Nike has to engage in a number of activities: Find athletes that succeed against the odds; identify them before they are wellknown superstars; sign the athletes; create products that are closely linked with the athlete; promote the athletes or teams and Nike products through TV ads and social media to create the desired image; and so on. Each activity contributes to the relative value of the product and service offering in the eyes of potential customers and the firm's relative cost position vis-å-vis its rivals. Over time, Nike developed a deep expertise in creating heroes. More importantly, having consistently better expectations of the future value of resources allows Nike not only to shape the desired image of the athlete, but also to capture some of the value these athletes create.

When Heroes Fall

Although this core competency made Nike highly successful, it has not been without considerable risks. Repeatedly, Nike's "heroes" have become unmasked as cheaters, frauds, and criminals, some of whom have committed serious felonies, such as (culpable) homicide. Long-time CEO and Chairman Phil Knight long ago declared that scandals surrounding its superstar endorsement athletes are "part of the game."3 So Nike appears to be comfortable in tolerating those risks, at least in some cases.

Sometimes Nike continued to sponsor its athletes involved in various scandals; other times it terminated its lucrative endorsement contracts. Nike continued to sponsor NBA star Kobe Bryant who was cleared of alleged rape charges. After Tiger Woods was engulfed in an infidelity scandal, Nike continued to sponsor the golf superstar. In 2007, Nike ended its endorsement contract with NFL quarterback Michael Vick after a public outcry and his subsequent felony conviction of running a dog-fighting ring and engaging in animal cruelty. In 2011, after serving a prison sentence and restarting his career at the Philadelphia Eagles, Nike signed a new endorsement deal with Vick. In 2012, Nike terminated its long-term relationship with disgraced cyclist Lance Armstrong. Just before Armstrong's public admission to doping in an interview with Oprah Winfrey, Knight answered, "Never say never," when asked if Nike would sponsor Armstrong again in the future. In 2013, Nike removed its ads with Oscar Pistorius and the unfortunate tagline "I am the bullet in the chamber," after the South African track and field athlete was charged with homicide.

In 2014, Nike got entangled in the FIFA (the world governing body of soccer) bribery scandal. It began 20 years earlier when Nike decided to gain a stronger presence in soccer after the 1994 World Cup was held in the United States. In 1996, Nike signed a long-term sponsorship agreement with the Brazilian national team worth hundreds of millions of dollars. This was a huge win for Nike because soccer has been the basis of adidas' success, much like running and basketball has been for Nike. Moreover, Brazil won the tournament five times (more than any other nation) and is the only team to have played in every tournament, which is only held every four years.

Nike is now alleged to have paid some $30 million to a middleman, who used that money for bribing

soccer officials and politicians in Brazil. This middleman—Jose Hawilla—has admitted a number of crimes including fraud, money laundering, and extortion related to the FIFA soccer investigation by U.S. prosecutors.

Time and time again Nike's heroes have fallen from grace, and the company itself has fallen under suspicion of wrongdoing. Clearly, Nike's approach in building its core competency of creating heroes is not without risks. Too many of these public relations disasters combined with too severe shortcomings of some of Nike's most celebrated heroes could damage the company's reputation and lead to a loss of competitive advantage. As Nike veers from one public relations disaster to the next, disappointment with the brand and its promise may eventually set in, causing customers to go elsewhere.

DISCUSSION QUESTIONS

1.     The MiniCase indicates that Nike's core competency is to create heroes. What does this mean? How did Nike build its core competency? Does it, for example, identify and leverage the potential identified in a VRIO analysis (are its competencies valuable, rare, inimitable, and organized to capture value) in a resource-based view of the firm?

2.     What would it take for Nike's approach to turn from a strength into a weakness? Did this tipping point already occur? Why or why not?

3.     What recommendations would you have for Nike? Can you identify a way to reframe the competency of creating heroes? Or a new way to think of heroes, teams, or sports that would continue to build the brand?

4.     If you are a competitor of Nike (such as adidas, Under Armour, New Balance, or Li-Ning), how could you exploit Nike's apparent vulnerability?

Provide a set of concrete recommendations.

(Must be atleast 2 pages long)

(The answer to this question must be atleast 2 pages long and must not be copy and pasted from previous answers)

Case Study:

Nike's Core Competency: The Risky Business of Creating Heroes

DURING THE LAST DECADE, Nike's annual revenues doubled and by 2018 attained some $35 billion. With its globally recognized brand, Nike is the undisputed leader in the athletic shoe and apparel industry. Number two adidas has some $22 billion in sales, while recent entrant Under Armour reports revenues of $5 billion. Nike is tremendously successful, holding close to a 60 percent market share in running shoes and nearly a 90 percent market share in basketball shoes and apparel. Yet one of its greatest strengths can also be seen as one of its greatest vulnerabilities. Before we introduce that strength, it helps to know how Nike started.

Nike Co-founders:

Bill Bowerman and Phil Knight

The Beaverton, Oregon, company has come a long way from its humble beginnings. It was founded by University of Oregon track and field coach Bill Bowerman and middle-distance runner Phil Knight in 1964 and was first called Blue Ribbon Sports. In 1971, the company changed its name to Nike (Greek mythology's goddess of victory) with the now iconic "swoosh" designed by a Portland State University student.

BOWERMAN'S ROLE. Coach Bowerman was a true innovator because he constantly sought ways to give his athletes a competitive edge. He experimented with many factors affecting running performance, from different track surfaces to rehydration drinks. Bowerman's biggest focus, however, was on providing a better running shoe for his athletes. While sitting at the breakfast table one Sunday morning and absentmindedly looking at his waffle iron, Bowerman had an epiphany. He poured hot, liquid urethane into the waffle iron—ruining it in the process but coming up with the now famous waffle-type sole that not only provided better traction but was also lighter than traditional running shoes.

ENTER KNIGHT. After completing his undergraduate degree at the University of Oregon and serving in the U.S. Army, Phil Knight entered the MBA program at Stanford. One entrepreneurship class required him to come up with a business idea. He wrote a term paper on how to disrupt the leading athletic shoemaker, adidas. The research question he came up with was, "Can

Japanese sports shoes do to German sports shoes what Japanese cameras have done to German cameras?"

At that time, adidas athletic shoes were the gold standard. They were also expensive and hard to find in the United States. After several failed attempts to interest Japanese sneaker makers, Knight struck a distribution agreement with Tiger Shoes. After his first shipment arrived in the United States, Phil Knight sent some of the running shoes to his former coach, Bill Bowerman, hoping to make a sale. To his surprise,

Bowerman replied that he was interested in becoming a business partner and contributing his innovative ideas on how to improve running shoes, including the waffle design. With an investment of $500 each and a handshake, the venture commenced.

Creating Heroes

Nike had already reached a level of success by the late 1970s. Based on a highly successful string of innovations including Nike Air, by 1979 the company had captured more than a 50 percent market share for running shoes in the United States. A year later, Nike went public. Even so, the company had yet to establish one of its most effective marketing tactics.

In 1984, Nike signed Michael Jordan—still early in his career, before he was hailed by many as the greatest basketball player of all time—with an unprecedented multimillion-dollar endorsement deal. Rather than spreading its marketing budget more widely as was common in the sports industry at that time, Nike made the unorthodox move to spend basically its entire budget for a specific sport on a single star athlete. Nike sought to sponsor future superstars that embodied an unlikely success story. Michael Jordan did not make the varsity team as a junior in high school, and yet he became the greatest basketball player ever. Nike's Air Jordan basketball shoes are all-time classics that remain popular to this day.

In the 1990s and 2000s, Nike continued to sponsor track and field stars such as Marion Jones as well as Kobe Bryant in basketball. With the help of major celebrity endorsements, Nike was also able to move on to different sports and their superstars, including golf with Tiger Woods, cycling with Lance Armstrong, soccer with Wayne Rooney, and football with Michael Vick. If some of those names trigger memories of scandals as well as athletic achievements, you see the problems that Nike risks with its endorsement program. Before going into the negatives, let's examine the powerful message behind such endorsements.

Nike is less about running shoes or sports apparel than about unlocking human potential. This is captured in Nike's mission to bring inspiration and innovation to every athlete in the world (and if you have a body, you are an athlete). ² Nike uses its heroes to tell a story whose moral is that through sheer will, tenacity, and hard work, anyone can unlock the hero within and achieve amazing things. Nike will help everyone become a hero. Just Do It! This type of mythical brand image has allowed Nike to not only enter but also often

Oscar Pistorius (left) and Lance Armstrong (right), some of Nike's past celebrity endorsements.

dominate one sport after another, from running to ice hockey. It spends more than $1 billion a year sponsoring athletes. Nike picks athletes that succeeded against the odds—cancer survivor Lance Armstrong, double amputee "blade runner" Oscar Pistorius, and other athletes hailing from disadvantaged backgrounds.

Nike astutely focuses on its core competency in athlete sponsorship and design, while it outsources noncore activities such as manufacturing and much of retailing. To create heroes, Nike has to engage in a number of activities: Find athletes that succeed against the odds; identify them before they are wellknown superstars; sign the athletes; create products that are closely linked with the athlete; promote the athletes or teams and Nike products through TV ads and social media to create the desired image; and so on. Each activity contributes to the relative value of the product and service offering in the eyes of potential customers and the firm's relative cost position vis-å-vis its rivals. Over time, Nike developed a deep expertise in creating heroes. More importantly, having consistently better expectations of the future value of resources allows Nike not only to shape the desired image of the athlete, but also to capture some of the value these athletes create.

When Heroes Fall

Although this core competency made Nike highly successful, it has not been without considerable risks. Repeatedly, Nike's "heroes" have become unmasked as cheaters, frauds, and criminals, some of whom have committed serious felonies, such as (culpable) homicide. Long-time CEO and Chairman Phil Knight long ago declared that scandals surrounding its superstar endorsement athletes are "part of the game."3 So Nike appears to be comfortable in tolerating those risks, at least in some cases.

Sometimes Nike continued to sponsor its athletes involved in various scandals; other times it terminated its lucrative endorsement contracts. Nike continued to sponsor NBA star Kobe Bryant who was cleared of alleged rape charges. After Tiger Woods was engulfed in an infidelity scandal, Nike continued to sponsor the golf superstar. In 2007, Nike ended its endorsement contract with NFL quarterback Michael Vick after a public outcry and his subsequent felony conviction of running a dog-fighting ring and engaging in animal cruelty. In 2011, after serving a prison sentence and restarting his career at the Philadelphia Eagles, Nike signed a new endorsement deal with Vick. In 2012, Nike terminated its long-term relationship with disgraced cyclist Lance Armstrong. Just before Armstrong's public admission to doping in an interview with Oprah Winfrey, Knight answered, "Never say never," when asked if Nike would sponsor Armstrong again in the future. In 2013, Nike removed its ads with Oscar Pistorius and the unfortunate tagline "I am the bullet in the chamber," after the South African track and field athlete was charged with homicide.

In 2014, Nike got entangled in the FIFA (the world governing body of soccer) bribery scandal. It began 20 years earlier when Nike decided to gain a stronger presence in soccer after the 1994 World Cup was held in the United States. In 1996, Nike signed a long-term sponsorship agreement with the Brazilian national team worth hundreds of millions of dollars. This was a huge win for Nike because soccer has been the basis of adidas' success, much like running and basketball has been for Nike. Moreover, Brazil won the tournament five times (more than any other nation) and is the only team to have played in every tournament, which is only held every four years.

Nike is now alleged to have paid some $30 million to a middleman, who used that money for bribing

soccer officials and politicians in Brazil. This middleman—Jose Hawilla—has admitted a number of crimes including fraud, money laundering, and extortion related to the FIFA soccer investigation by U.S. prosecutors.

Time and time again Nike's heroes have fallen from grace, and the company itself has fallen under suspicion of wrongdoing. Clearly, Nike's approach in building its core competency of creating heroes is not without risks. Too many of these public relations disasters combined with too severe shortcomings of some of Nike's most celebrated heroes could damage the company's reputation and lead to a loss of competitive advantage. As Nike veers from one public relations disaster to the next, disappointment with the brand and its promise may eventually set in, causing customers to go elsewhere.

DISCUSSION QUESTIONS

1.     The MiniCase indicates that Nike's core competency is to create heroes. What does this mean? How did Nike build its core competency? Does it, for example, identify and leverage the potential identified in a VRIO analysis (are its competencies valuable, rare, inimitable, and organized to capture value) in a resource-based view of the firm?

2.     What would it take for Nike's approach to turn from a strength into a weakness? Did this tipping point already occur? Why or why not?

3.     What recommendations would you have for Nike? Can you identify a way to reframe the competency of creating heroes? Or a new way to think of heroes, teams, or sports that would continue to build the brand?

4.     If you are a competitor of Nike (such as adidas, Under Armour, New Balance, or Li-Ning), how could you exploit Nike's apparent vulnerability?

Provide a set of concrete recommendations.

If the company expands its product selection, what types of new customer categories should be considered? Will the new customer constituents resemble the existing ones? Perform a hypothetical customer profitability model analysis on the new customers.

You are considering adding a new product to your firm's existing product line. It should cause a 10 percent increase in your profit margin (i.e., new PM = old PM x 1.1), but it will also require a 25 percent increase in total assets (i.e., new TA = old TA x 1.25). You expect to finance this asset growth entirely by debt. If the following ratios were computed before the change, approximately what will be the new ROE if the new product is added and sales remain constant? Ratios before new product were Profit margin=0.10, Total assets turnover=2.00, and Equity multiplier=2.00.

• A. 44%
• B. 48%
• C. 25%
• D. 28%
• E. 34%

M+V Growth: 8%

Long-Run Growth: 4%

Expected Inflation: 4% Large and unexpected increase in government spending

Carefully draw the three curves (AD, LRAS, and SRAS in long run equilibrium at the point indicated above). Label that triple intersection LR1.

• Using a new color draw a new curve or curves consistent with your Scenario.

• Label that new intersection SR1, indicate on your graph a reasonable level of GDP growth and inflation for this new equilibrium.

• What happens to Unemployment at SR1 (does it go up, down, or stay the same)?

• Find the new Long Run equilibrium and label it LR2, indicate on your graph a reasonable level of GDP growth and inflation for this new equilibrium.

1. If a seed is planted, it has a 85% chance of growing into a healthy plant.

If 10 seeds are planted, what is the probability that exactly 2 don't grow?

2. A poll is given, showing 40% are in favor of a new building project.

If 6 people are chosen at random, what is the probability that exactly 4 of them favor the new building project?

3. A poll is given, showing 70% are in favor of a new building project.

If 10 people are chosen at random, what is the probability that fewer than 6 of them favor the new building project?

4. A poll is given, showing 30% are in favor of a new building project.

If 7 people are chosen at random, what is the probability that greater than 6 of them favor the new building project?

A researcher is interested in studying whether a new stretching technique affects the time needed to complete a certain running exercise. The times of 4 randomly selected participants were measured before the new stretching technique was used, and then the times for the same participants were measures after the new technique was used. The resulting data is

Is there a significant difference between the mean times with and without the new stretching technique?

1) What are the appropriate competing hypotheses?

2) What is the value of the test statistics?

3) What are the appropriate degrees of freedom?

4) What id the rejection region

5) p-value

6) test decision

MacLoren Automotive manufactures British sports cars, several of which are exported to New Zealand for payment in pounds sterling. The distributor sells the sports cars in New Zealand for New Zealand dollars. The New Zealand distributor is unable to carry all the foreign exchange risk and would not sell MacLoren models unless he could share some of the foreign exchange risk. MacLoren has agreed that sales for a given model year will initially be priced at a base spot rate between the New Zealand dollar and pound sterling set to be the spot mid-rate at the beginning of that model year. As along as the actual exchange rate is within ±5% if that base rate, payment will be made in pounds sterling. That is, the New Zealand distributor assumes all foreign exchange risk. However, if the spot rate at the time of shipment falls outside of this ±5% range, MacLoren will share equally (i.e. 50/50) the difference between the actual spot rate and the base rate. For the current model year, the base rate is NZ$1.64/£.

Source: Mutltination Business Finance by Eiteman, Stonehill, Moffett

a.) If MacLoren ships 10 cars invoiced at £32,000 per car, what would be the total cost to the New Zealand distributor in New Zealand dollars when the cars are shipped at the spot rate of NZ$1.70/£?

b.) If MacLoren ships 10 cars invoiced at £32,000 per car, what would be the total cost to the New Zealand distributor in New Zealand dollars when the cars are shipped at the spot rate of NZ$1.75/£?

c.) If MacLoren ships 10 cars invoiced at £32,000 per car, what would be the total cost to the New Zealand distributor in New Zealand dollars when the cars are shipped at the spot rate of NZ$1.50/£?

Question 1 (10 Marks - Suggested time approx. 23 minutes)
Northern Lights Company is considering the purchase of a new machine. The invoice price
of the machine is $140,000, freight charges are estimated to be $4,000, and installation
costs are expected to be $6,000. Salvage value of the new equipment is expected to be zero
after a useful life of 5 years. Existing equipment could be retained and used for an additional
5 years if the new machine is not purchased. At that time, the salvage value of the
equipment would be zero. If the new machine is purchased now, the existing machine would
have to be scrapped. Northern Lights’ accountant, Lisah Huang, has accumulated the
following data regarding annual sales and expenses with and without the new machine.
? Without the new machine, Northern Lights can sell 12,000 units of product annually at a
per unit selling price of $100. If the new machine is purchased, the number of units
produced and sold would increase by 10%, and the selling price would remain the same.
? The new machine is faster than the old machine, and it is more efficient in its usage of
materials. With the old machine the gross profit rate will be 25% of sales, whereas the
rate will be 30% of sales with the new machine.
? Annual selling expenses are $180,000 with the current equipment. Because the new
equipment would produce a greater number of units to be sold, annual selling expenses
are expected to increase by 10% if it is purchased.
? Annual administrative expenses are expected to be $100,000 with the old machine, and
$113,000 with the new machine.
? The current book value of the existing machine is $36,000. Northern Lights uses straightline
depreciation.
Required
Prepare an incremental analysis (over the 5 years) showing whether Northern Lights should
keep the existing machine or buy the new machine. (Ignore income tax effects.)