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Transcript of Nike
Price and Price Elasticity of Demand
Wages at Nike depend on the job of a particular employee. Examples include: systems analyst $87,000, sales manager $89,000, Engineer $76,000, project manager $80,000, graphic designer $51,000, marketing agent $105,000, and accountant $50,000. Benefits also vary according to each specific job. Benefits can include Health Insurance, Life and Accident Insurance, Product Discounts, Retirement Savings Plans, Tuition Assistance, etc. Fixed Costs for Nike can include the rent they have to pay for rental of factory buildings and machinery, depreciation of machinery, and salaries to workers. Variable costs for Nike can include the amount of labor hired, amount of specific products produced, and amount of inputs purchased.
Nike brings new products to consumers in a variety of ways. One of these ways can be examined by looking at the development of a new shoe product. The first step is to anticipate the consumer’s needs. This established Nike’s mission from its beginning when the company declared that it wanted to bring the best material to people all over the world. The next step is severe research and development, which can include tests and experiments with athletes to analyze and manufacture the best product for athletes. Next, Nike selects several individuals in countries around the world to test the product. After the product has been prepared, Nike takes the product to the television and streets to advertise their new product.
Developing a New Product
Nike’s competitors include Adidas, New Balance, Converse, Adidas, and Puma.
Supply and Demand Analysis
Nike’s competitive strengths include significant brand recognition throughout the world. Nike has established its global image by its endorsement deals with star athletes like Michael Jordan, Kobe Bryant, Tiger Woods, and LeBron James. Furthermore, Nike, like many of its competitors, has chosen to outsource manufacturing of its goods to countries all over the world. A problem that comes with this outsourcing is management of the quality and production of goods in these factories. However, in recent years Nike has maintained a sturdy staff throughout each of these countries responsible for supervising each factory. Also, Nike has recently conducted significant contracts with each company that certifies that there are at least some standards are maintained. They are able to maintain these contracts because many of these foreign manufacturing companies only do business with Nike, so Nike has a significant influence over the manufacturing companies. Another strength of Nike is that it leads all of its competitors in innovation. This can be directly evidenced by the emergence of Nike’s new design website that allows its customers to design hundreds of different types of shoes they way that they would like it. Finally, Nike has strong customer satisfaction reviews due to constant innovation and research dedicated to creating the best type of shoe for all customers.
Nike’s weaknesses include its reliance on manufacturing companies overseas. Nike doesn’t benefit from this reliance because many of these companies are subcontracted from Nike, so Nike doesn’t really have full control over these companies. Thus, there are many human rights violations, unsanitary conditions, and more in these factories. In an effort to combat these practices, Nike has issued terms under their contracts with these companies mandating better working conditions on the factories. While this has shown significant increases in the factory letter grades assigned by Nike, there are still many companies in the B and C range. Thus, gradually these companies will get better, but in the short run Nike’s reliance on these overseas companies will prove detrimental to its public image. Another weakness comes from Nike’s competition. On average, Nike’s shoes are $10-$15 more expensive than one of its competitors Adidas. Many consumers view Nike and Adidas as substitutes. Therefore, with Nike’s goods priced higher, many consumers may be likely to substitute Nike goods with Adidas goods.
Weak and Strong Sides
Nike is part of an oligopoly market structure. Nike has a 31% share of the footwear industry, Adidas (after merger with Reebok) has a 16% market share, and Converse has a 4% market share, and New Balance has a 6% market share. Therefore, the top four firms in the footwear industry enjoy market shares of 57%.
Nike produces three general products; shoes, clothing, and gear. Nike creates shoes for almost every single sport/activity ranging from running to basketball; produces several types of clothing items created to enhance the performance of athletes, runners, swimmers, and many more; and produces several types of gear to aid all types of athletes.
The productivity of Nike has seen dramatic change in the past 4 years. By fiscal year 2010, Nike graded all of their factories based of a letter grade ranging from A to E. The results of these ratings showed that 7% of factories were rated as D and an astounding 29% of factories were rated as an E. The reasons behind the grading scale include work hours, factory conditions, wages, and more. However, by fiscal year 2011, Nike reported that only 5% of factories were ranked as D and 9% of factories were ranked as F. This progress can be seen by the company’s implementation of a redesigned sustainable supply chain. The results of the sustainable supply chain can be seen best in their implementation of lean manufacturing. By combining a more effective manufacturing process by eliminating waste, leadership supervision, and an empowered workforce, Nike lean footwear factories were able to increase productivity by 10-20%. Apparel lean factories have decreased the amount of defects by 50% and footwear lean factories have shortened the time for a new model to be introduced by 30%.
The average price for a pair of Nike shoes is $70 to $75, the average price for clothing can range to $28 for a dry fit shirt or $60 for a zip up jacket, and finally Nike gear can range from $40 for a duffel bag to $150 for a power armband. Thus, in many of these situations we can see that the cost of Nike products will take up a significant part of an average person’s income. Also, due to the emergence of companies like Adidas and New Balance, there are many substitutes for shoes. Overall, due to a substitution effect and an income effect, the demand for many Nike products should favor the elastic side. However, due to Nike's ability to endorse star athletes like LeBron James, Tiger Woods, Serena Williams, and many others, Nike is able to have significant brand power throughout the world. As a result, this brand power allows Nike to earn profits when pricing its products relatively high. This means that the demand for Nike's products favor the inelastic side.
Nike’s supply and demand is represented by a downward sloping demand curve and upward sloping supply curve. Overall the past several years, the influence of Nike products has grown due to its emergence at major sporting events, in different countries, and more. Furthermore, due to many famous athletes like LeBron James and Kevin Durant signing with Nike, even more people have come to demand their product. Thus, the popularity of Nike has increased significantly and allowed the company to establish high prices. Also, Nike produces at a quantity where it’s supplies are limited enough to establish these high prices. For example, when Nike releases a new shoe, they produce just enough at a high price so that consumers will still be willing to buy it. With these tactical strategies, Nike is able to use its influence to maintain profitable production.
In the future, I believe the domestic footwear industry will remain an oligopoly with Nike at the forefront of market shares. Nike currently continues to expand in terms of research and development. Up to this day, Nike has lead the domestic footwear industry in development of sustainable footwear, which reduces environmental pollution and maximizes usage of inputs. Overall, Nike continues to develop ways to produce shoes that minimize production costs. This allows them to create shoes that aid customers all around the world.
Advances in Technology
Nike has outpaced all of its competitors in producing advanced technology. Over the past couple of years, Nike has released new technology to enhance its customer’s performance in athletic endeavors. Nike has sponsored with Apple in creating technology that monitors the distance and time a person has ran or walked. Nike has released new dry fit technology that wicks away sweat. Even recently, Nike has released a new Fuel Band that monitors whole body movement for practically any activity. Thus, Nike will continue and expand upon revolutionary technology in the upcoming future. The company’s goal to enhance the everyday lives of its customers motivates it to continue creating breakthrough technology. This production and innovation will certainly increase in the future.
Nike relies heavily on foreign manufacturing companies that are one of the major sources of problems like contamination, pollution, waste, and more. To combat these environmental harms, Nike has committed to developing a sustainable supply chain that focuses on eliminating these problems. Examples of this new strategy include Nike’s production of the 2010 World Cup jerseys from recycled plastic bottles, Nike’s new Nike Materials Sustainability Index that allows Nike designers to create new material with less environmental impacts, and the Nike Flyknit manufacturing process that knits the upper part of each shoe together in order to reduce waste. The efforts to change the supply chain allow Nike to create a supply chain that is green, lean, equitable, and empowered. In the future, the Nike’s supply chain will become even more productive as they work to maximize the utility of their inputs and drive down waste. The law of diminishing marginal utility plays a significant role with Nike because like any business, Nike can’t hire millions of workers to produce its goods. However, at its current state, Nike has hired slightly above a million workers throughout the world. At its current state of production with the amount of workers hired and with the thousands of products it offers, Nike has increased production from years past and will continue to do so in the future.
Fixed and Variable Costs
In the future, Nike should continue to expand in technology to aid its workers in producing efficient products. With the sustainable supply chain, Nike will continue to advance research in producing better production processes. Thus, Nike will be less likely to buy hundreds of more factories and instead work on helping its subcontracted factories enhance their production. By doing this, Nike’s fixed costs will turn more to machinery and less to the cost for new factories. Nike’s variable costs will also be affected because better production processes will decrease Nike’s cost of inputs as it continues to maximize its usage of inputs. The effect of this maximization will play a larger effect than the variable cost of worker’s salaries and the variable costs of goods.
Impacts of Government Regulation
Nike’s reliance on production in foreign manufacturing companies in countries like China leaves Nike free from government regulations in countries like America and Britain that require minimum wage, sanitary factory conditions, hazard less work environments, and more. Furthermore, Nike is not under direct control of its foreign manufacturing partners because Nike only subcontracts with these companies. Therefore, Nike is free from severe government regulation in the countries of its manufacturing partners. However, due to ethical concerns voiced by the public all over the world, Nike has pressed its foreign companies on contracts ensuring that there is at least some control over the conditions of each factory. In the future, Nike will most likely continue to outsource to foreign countries, which continues to leave the company free from government regulation.
Adidas and Nike are at the front of the competition in the domestic footwear industry for many reasons. Endorsement of star athletes is one of the biggest reasons they lead the footwear industry. Looking to the past, we see that both companies have endorsed star athletes like Michael Jordan, Tiger Woods, Serena Williams, Shaquille O’Neal, and more. With these star athlete endorsements, these two companies are allowed to put these athletes in plenty of advertisements through the country. Ultimately, this allows the consumers to have significant brand recognition with Nike and Adidas. As more people see LeBron James wearing Nike products in commercials on TV, they are more likely to buy from Nike over the competitors. This significant advantage, along with other advantages, that Nike and Adidas have makes it very difficult for new competitors to develop a strong share in the footwear industry. Another aspect that specifically sets Nike apart from its competitors is the large amount of manufacturing companies sub contracted with Nike throughout the world. New competitors in the industry will face difficulties in trying to spread across the world to produce their goods.
Global Competition from rivals like Adidas has fueled Nike to differentiate itself from its rivals. Nike has done this not by only producing footwear for its customers, but also by creating apparel and gear designed to enhance the performance of its customers in athletic endeavors. Nike has done this by creating the dry fit technology and the Fuel Band, along with other innovations. To remain in front of its competition, Nike has focused its activities on leading the industry in innovation and branding. Thus, competition has fueled the spread of the Nike swoosh around the world.
Nike should continue to expand in order to maximize profits. As more and more of the world’s population expands into the middle class, more people will able to afford luxuries like the next best shoe technology. Since Nike is at the forefront of the footwear industry in terms of innovation, the company will be the primary source for these new customers. Another reason to expand is the new concern over health around many parts of the world. Especially in America, more people are concerned with their health and are focusing on living a healthier life style. Since exercising and physical activity is a major source of this lifestyle, many people will commit to these activities. Also, since Nike is known worldwide to create products that can aide these people in physical activities, more people will be likely to buy Nike’s products. Thus, to increase profits, Nike should continue to expand.
Nike should invest in new technology to bolster its production process. In its effort to create a sustainable supply chain, new technology will be key to enhance the production process.
Nike should not consider a merger with another organization because it already dominates its industry. If it does pursue a merger, then it will be closer to forming a monopoly, which can be dangerous for consumers around the world.
If Nike does decide to expand, then its biggest problem will be distinguishing between what is right and wrong. If Nike does chose to expand in terms of buying more factories, then it will be put into more positions where people will question the conditions of the factories that it has expanded into. Humans rights will be a source of controversy at every turn for the company. On the other hand, if Nike decides to expand in terms of technology to find a more efficient way of producing its goods, the company will be following the world wide push for a cleaner environment.
Investment in Technology