Nike is the market leader in athletic shoes in the United States. The Oregon based company has always utilized offshore facilities in low-income countries to produce at minimal costs followed by importation into predominantly the US for sales. Nike is quick to divest from emerging markets as costs rise and has recently signed short term production contracts with a long term strategy of production in China. Unlike Nike’s previous global endeavors, the political and cultural atmosphere in China has made the collaboration more demanding. Opportunities
As the South Korean standard of living continued to improve, expected wages grew forcing Nike to look elsewhere for low cost shoe production. Market research identified China and India as the best long term possibilities for the new production facilities based on finances. Due in part to a trusting relationship between Nike and the Chinese government based on the family lines of vice president David Chang, China was determined to be the optimal location to grow. The possibility of a joint venture giving Nike access to a possible billion customer market was another opportunity that could only be found in China. Issues in China
Nike has spent the last four years building facilities, training staff, and developing relationships in China. Unlike other facilities in low GDP countries that had been utilized previously, the China collaboration has been less than successful. The current infrastructure combined with landlocked facilities made transportation logistics difficult. The Chinese government had certain expectations and standardization requirements that were misaligned with Nike’s incentives in terms of quality, pay, pricing, and employee motivation. The PRC government also created difficulties in import/export restrictions causing logistical problems with raw materials, specifically anything entering the country through South Korea, a major Nike supplier. While a foothold in China could eventually lead to an enormous new customer base, the current global strategy was ill suited to take advantage at the current time. Options
* Shift strategies in China from global to multi-domestic to take advantage of the market. This option would require the formation of a joint venture with the Chinese government. * Move factory locations to reduce transportation and logistics issues. * Pull out of China completely.
We believe the government regulations will make quality improvement and cost effectiveness highly unlikely in China. Furthermore, a multi-domestic strategy requiring a high investment rate would be required to take advantage of the Chinese population as a new customer market. With low expendable income and a forced joint venture with the government necessary to sell Nike in China, we determined that selling in China is not currently an option. As such, the team recommends an urgent identification of new possible production environments with a concerted and eventual total divestiture in China. Questions
a. How has Nike conceptualized the athletic shoe industry: global or multi-domestic? Justify your answer. What are the implications of this conceptualization? Nike instituted a global strategy, as opposed to a multi-domestic strategy, from the company’s onset to compete in the athletic shoe industry. Knight identified opportunities abroad to reduce costs in the upstream functions of the value chain. Through the coordination of overseas operations integrated with US downstream functions focused on local US markets, Nike’s utilization of a Porter-defined global strategy has brought the company to China. The Far East’s Role in the Value Chain
Beginning with the first Japanese facilities, Nike factories located in the Far East, Europe, and South America have accounted for approximately 93% of shoe production with only minor assembly in the US. The identified regions within this concentrated configuration were almost...
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