Abstract
The question which defines this extended essay “How will Nike´s growth strategies be successful in improving their financial performance by 2015?”
In May 2010, Nike, Inc. Unveiled its growth strategies and initiatives for achieiving sustainable, long-term growth, with a revenue target of US$ 27 billion by the end of 2015. This is the consolidated target of Nike’s business lines that include the Nike brand, Cole Haan, the Jordan brand, Nike Golf, Umbro, Converse and Hurley. From this revenue target, the company believes it can achieve a US$ 12 billion cumulative free cash flow from operations until 2015.
Mark Parker, NIKE, Inc. President and CEO said:
“Our long-term financial model helps us stay focused on driving sustainable, profitable growth, powerful cash generation, and preserving a very strong balance sheet, all of which gives us tremendous flexibility to invest in our business and generate extraordinary shareholder value. We’ve never been more inspired, innovative and aligned to achieve our goals,” “We have powerful competitive advantages in our portfolio – innovative and compelling products, brands that are distinct and relevant to their consumers, and the world’s greatest athletes and teams. Our focus is to build, fuel and accelerate the power of our portfolio.”
Nike is the world principal maker of athletic footwear and provider of (Enderle et.a,l 2000). Towards its marketing strategies Nike has grown as a one of the largest multinational corporations in the world. In the last ten years, Nike has achieved or exceeded all of the company’s financial goals.
Nike's revenues and earnings per share have grown 9% and 15% on an annual compounded basis in the last five years, respectively. The company’s return on invested capital has increased from 15% to 22% and had expanded gross margins by 4 percentage points within the same period. Nike has leveraged on its very appealing “Swoosh” logo which increased the sustainability of the brand image. In addition, the hit slogan “Just Do it” also maintained the reputation of the business that helped the company retain its market leadership through the current global economic slowdown.
The most significant issue for Nike are issues revolving around child labor laws, wages and outsourcing effect on sales. Nike has been hit by the press for these issues to which the company has tried in earnest to mitigate. Still, legal, cultural and ethical issues challenge the company. One such concern for example is the issue of Nike’s production facility in Vietnam where employees were reported to be suffering from respiratory problems. However the company has been working hard to provide more accurate information about its operation to ensure that it is conducting its business ethically and with utmost regard for the environment and its employees.
Introduction
Nike was founded on January 25, 1964 by “University of Oregon track athlete Philip Knight and his coach Bill Bowerman” as “Blue Ribbon Sports”. In 1978, the American company was renamed “Nike” in homage to the Roman “goddess of victory”. Between 1964 to 1978, Nike created the first “brand advertisement” called “There is No Finish Line” which helped the company achieve a market share of about 50% in the US, fueling the company’s next step of listing in the stock market. In December of that same year, Nike was listed in the New York Stock Exchange.
Nike is a multinational company having operations worldwide and having an impact of a lot of developing economies where the company has set up its production facilities. As of 2012, Nike employs more than 44,000 people worldwide.
The Nike brand is the most valuable brand in the sports business industry, having a value of approximately $10.7 billion. The brand accounts for about 85% of Nike’s total revenue. Other brands contribute to the company’s growth strategy, including the acquisition of Umbro which puts Nike in the position of becoming the biggest football company in the world, Hurley that puts Nike in a commanding position in the beach and outdoor wear market, Converse which adds about US$ 1 billion to Nike and Cole Haan which has tremendous growth potential.
Nike also markets their products under their own name such as “ Nike Pro, Nike + and Nike skateboarding” which makes their reputation for the brand increase. “In addition to manufacturing sportswear and equipment, the company operates retail stores under the Niketown name”. This has helped the company achieve stability even during the global economic slowdown. In fact, Nike has even weathered some cultural issues that it has encountered recently.
In 2009, Nike began a campaign to distract attention from the negative press about labor practices in Southeast Asia which made people to believe that the company was violating worker’s rights. To mitigate this, Nike changed their ideas towards linking the company to customers.
Strategic decisions such as this make the company highly competitive. The company’s ability to identify and solve its problems decisively adds to its financial prowess that ultimately results in growth.
Income Evolution
Nike financial performance is shown in the figure above. From 2007 to the 2015, Nike’s sales have been continuously increasing, except for 2009 where Nike experienced a slight dip in sales due to the global economic slowdown. Operating profits have been increasing steadily in the from 2007 to 2012 and are projected to continue its upward trend until 2015. Overall, the company is highly profitable and sustainable, given its mammoth market share, efficient production processes and unbeatable marketing strategy.
Balance Sheet Analysis
“Book value per share is a market value financial ratio. The purpose of this analysis is to relate shareholder’s equality to the number of shares of common stock outstanding. The graph below shows that Nike’s resource use is highly efficient and optimizes shareholder value.
It means that Nike’s book value since 2007 has always been increasing which processes that the shareholders raises their input in money every year to the business. Cash flow describes “the amount of money moving in and out of the business within a certain period”. It also explains the number of outstanding shares that the business has, which means that the number of investments held by the investors increase and decrease over the years.
Finances
Financial Objectives for 2015
Nike’s objectives for 2015 are to grow the Nike brand across North America, Western Europe and Japan as well as to continue its growth in emerging markets of China and Brazil. The company plans to add an additional US$ 3 to 3.5 billion in revenues from growth in these geographical regions by the end of 2015.
Nike will also leverage its brand to generate around US$ 23 billion by the end of 2015. Nike’s exposure in the upcoming Olympic games and the World Cup will further boost brand value and drive up company’s profitability. Nike’ growth strategy also includes the acquisition of related brands such as Converse, Hurley and Umbro, contributing an estimated $1.5-2.0 billion of revenue by the end of fiscal 2015,
Nike’s long-term financial goals help the company “stay focused on driving sustainable, profitable growth, powerful cash generation, and preserving a very strong balance sheet, all of which gives us tremendous flexibility to invest in our business and generate extraordinary shareholder value”.
In summary, the primary financial objectives through 2015 were summarized by Nike CFO Don Blair to include the following:
- High single-digit revenue growth (average annual rate)
- Mid-teens earnings per share growth (average annual rate)
- Return of invested capital of 25%
- Increasing dividends within a target calendar year payout range of 25-35% of trailing four quarter earnings per share.”(10)
In comparison with the company’s 2012 objectives, which are:
- Increase market share and expand its Converse brand to double the value of the profits made.
- Take advantage of the African World Cup where new products are likely to make its first appearance and therefore look forwards to benefit from the “popular global sporting event”.
Growth Objectives
- Investment in new markets
Nike plans to invest aggressively in its developing market geographies (Greater China, Central & Eastern Europe and Emerging markets) targeting low double-digit growth and an additional $3.0-3.5 billion revenue by the end of fiscal 2015.
- Open Nike branded stores worldwide
Nike plans to open new stores with a greater global item and therefore increase more profit with the encouragement of innovation. The company plans to open approximately 250-300 new NIKE-branded stores worldwide over the next five years to elevate the consumer experience and position the brand in the world’s premium shopping locations, as well as drive accelerated growth in digital commerce. Given these efforts, Nike Inc. Expects mid-teens growth in its “Direct to Consumer Business which should contribute and additional $2.2-2.6 billion by 2015”.
- Designing products specially for marketing Americans
Nike plans to “build a strong momentum in growing fitness market and to explore the market for products specifically designed for the requirements of maturing Americans”. This means that Nike wants to continue and manoeuvre for increase margins for the management and improvement in Products.
Strength-Weaknesses-Opportunities-Threats (S.W.O.T) Analysis
In 1976, the company hired John Brown and Partners, based in Seattle, as its first advertising agency”. The brand name increased significantly with the famous slogan “Just do it” with the encouragement to “Let’s do it” it turned into one the most famous slogans around the world. This “allowed Nike to further increase its share of the domestic sport-shoe business from 18% to 43%, (from SEK 6109.40 million to SEK 64.09 billion in worldwide sales) from 1988 and 1998. In May 31, 2012, Nike announced its intention to sell both Cole Haan and Umbro” which the company says is a portion of the proactive management move to explore new segment and new markets.
Nike succeeds because the company is obsessed with innovation. Nike believes in making things better. According to a Nike executive “We apply that curiosity to our sustainability efforts, and we continue to learn what is required for real, meaningful progress “.
However, it important to know that this zealous drive is one of Nike’s principal weaknesses. Nike spends a total of US$ 1.7 billion dollars a year on advertising, which takes a huge chunk out of its balance sheet. While this has propelled Nike forward, it presents an imminent threat in that its closest competitors Adidas (merged with) Reebok have spent less on advertising and more on process integration.
In the next decade the competition for new revenues, new markets, new products and new services will continue to intensify. To fulfill our potential we know we need to operate in completely new ways, making sustainability integral to our innovation and performance.”(20) Faced with the situation of unpleasant opportunities that direct customers prefer the substitute products for a more economical price. This makes the profits of Nike decrease as these products are cheaper and makes the consumers closet to the company choose products, which they are willing to pay.
The last threat is that businesses like Nike have to be prepared to always produce otherwise continuous innovation will be created from other competitors and therefore their demand will decrease which cannot happen. Their opportunities is to explore the possibility of exports towards new markets, explore the deepening of desertification, explore the deepening of displacement site and the expansion of the business of the new segment from customers touting the brand to new markets.
Political, Economic, Social and Technology Analysis (PEST) Analysis
- Political Analysis
Companies such as Nike need to have a good relation with the government, which influences the development of the business in relation with the progress of the products. “The US government, particularly in the general macroeconomic stability, low interest rates, stable currency conditions and the international competitiveness of the tax system.” This would be a great opportunity towards the advertisement of Nike.
- Economic Analysis
Nike trades with great political countries like France and Germany where their imports and exports enhance the euro, which is easier to operate between them. “This is an advantage to Nike, as they do not need to be influenced by exchange rates when exporting goods from once country to the other”. (22)This would be a great opportunity towards the advertisement of Nike. Nike also has to be careful of the “campaign groups” which are trying to forbid the approach in which they use such as “exploitation of workers. “The Asian economic crisis also affects Nike since its goods are manufactured in Asia”.(23)
- Social Analysis
The decision most important for Nike is to consider how the products are to the satisfaction of the customers. Nike has to make questionnaires and research to consider the most efficient products the consumers like. They will have to observe the ways which people are more attracted such as the Internet delivery and mail order that would be easier to have their goods delivered. Nike also needs to be informed the average time customers waste towards shopping. “People have got to go shopping and whether they work unsocial hours meaning that Internet shopping may be more affective to larger amounts of people”. (24) Another factor Nike has to consider is the clothes that they have should not have a large amount of products because the weather changes and a product have to be adequate for the climate it has.
- Technological Analysis
Nike needs to be aware of the new technologies because it innovates the products, which makes it “quicker, easier and cheaper to make the products”. (25) Other big areas of Nike are the Internet where selling the products online will be a “huge market” with great amounts of profits. Not just the Internet, advertisement also influences technology as a great advertisement with creative and innovation would have a huge impact towards the profits of the company. “Nike are always trying to make new products with new and unique designed to do a specific job”. (26)
Conclusion
In the older days Nike operated by pure instinct. Throughout the years, Nike has made itself highly competitive, efficient, profitable and sustainable. The company has benefited greatly from economic integration, social and integration of the cultural space of different countries due to globalization. How has Nike been able to evolve into one of the most successful multinational companies on this planet?
It does so by leading with a vision. The organization of the company puts each person in the position where a very specific idea must be embraced by everyone. Nike espoused a common vision and that vision has been embraced by everyone in the organization. All efforts in the company have clear CEO support, through actions and interactions within and outside the company.
Nike sets clear targets and metrics in measuring progress and success. It does so at every stage of the business activity and often refers to its measurements as basis for its future actions.
Nike’s change management includes the provision of tools for easy adoption of its strategies. Nike feels that it is important to educate, train and provide tools that engage its people to become more effective. This is transmitted from the design teams to the production teams to the support teams and throughout the rest of the Nike organization and across all of its brands in all geographical regions.
Nike knows that it is important to celebrate and reward success. It creates incentives that drive change and innovation, thereby making the company more competitive. It also encourages healthy competiton between teams and brands and across geographies, recognizing the efforts each individual puts into his work.
Nike’s work morale is at its very highest, with the company striving to make its work practices more efficient and equitable for its employees, suppliers and partners. Nike focuses on marketing and sales, levering on its brand and reputation.
Nike’s financial management has been superb, to the point that tis autonomous financial branches that are delineated on a per sport basis, are all highly efficient and profitable. Nike’s six categories -- football, basket, race and sports action are all autonomous and work with dedicated teams of designers and people within business units and within the brand.
References
Enderle, K., Hirsch, D., Micka, L., Saving, B., Shah, S. And Szerwinski, T. 2000. Strategic Analysis of Nike, Inc. DePaul University, Chicago. Retrieved from
Enhanced Online News. 2010. NIKE, Inc. Introduces 2015 Global Growth Strategy Retrieved from
Yahoo! Finance. 2012. Nike, Inc. Retrieved from
