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Nike- an Ecnomic Report

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CHAPTER 1: COMPANY BACKGROUND Nike is the world’s leading designer, marketer and distributor of athletic footwear, apparel, equipment and accessories for a range of sports and fitness activities. Nike is headquartered in Beaverton, Oregon and owns facilities in Tennessee, North Carolina and The Netherlands. The company operates in the Americas, Europe, the Middle East, Africa and Asia Pacific. Nike’s primary product focus is athletic footwear designed for specific-sport and/or leisure use. Nike is the world’s largest supplier of athletic footwear, with an estimated share of 50% of the billion market.

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Sports apparel and equipment are also sold under the Nike banner. Nike is classified under the Footwear manufacturing and marketing industry with a Standard Industrial Classification Code (SIC) 3021- Rubber and Plastics Footwear and its primary North American Industry Classification System (NAICS) code is 316211 – Footwear Manufacturing in the US. CHAPTER 2: MARKET DEFINITION Products: Nike primarily caters to the vast market for athletic footwear and athletic apparel in the world.

It is the largest seller of athletic footwear worldwide by sales.

Its operations can be divided into three product lines: footwear, apparel and equipment. Footwear is Nike’s largest product category, representing about 52% of the company’s revenue followed by apparel product line (28%) as shown in Exhibit 1. 1 (Refer Exhibits). In addition to its namesake Nike brand, the company also develops and markets footwear and apparel products under the Cole Haan, Converse, Hurley International, and Umbro Inc. brand names. Geographical segmentation: Nike sells its products in over 180 countries worldwide through its company-owned retail stores and internet sites, as well as through retailers.

The company divides its sales into four regions across the globe- the United States, Europe, Middle East and Africa (EMEA), Asia Pacific, and Central and South America. In 2008, these regions accounted for 34. 2%, 30. 2%, 15. 5%, and 6. 2% of Nike’s revenue, respectively as shown in Exhibit 1. 2 (Refer Exhibits). The area of focus in this report is the United States where Nike makes over 34% of its revenue. Market Segments: Nike targets a wide range of customers depending on the type of product offered. Its market segment covers a broad spectrum of customers ranging from teens, age groups 16-20 yrs; to adult age roups 21-40 yrs. Lately Nike also has products for kids aged between 3yr- 7yrs. Although Nike’s main target group was men and mostly athletic professionals, over time it has expanded its product line to accommodate female customers and non-athletes. CHAPTER 3: MARKET STRUCTURE Competitors: Nike sells products for such a wide variety of sports that it not only competes against many niche companies, like New Balance, Fila, ASICS, Columbia Sportswear, but also against similar large athletic footwear and apparel manufacturers like Adidas AG, Puma, Reebok, Skechers. Competition in the footwear industry is medium and steady.

Thus, the market structure for Nike’s footwear is monopolistically competitive with many medium-small scale and large scale companies vying for market share. The major competitors along with the market shares are shown in Exhibit 1. 3 (Refer Exhibits). Nike not only has to compete with athletic footwear manufacturers but also with other regional casual/fashion footwear manufacturers like Timberland Company, Wolverine World Wide, Phoenix Footwear, Dick’s Sporting Goods, Finish Line, Big Five, and Hibbetts. Product Similarity: There are companies like Adidas, Reebok, Fila, and Puma who manufacture footwear similar to that of Nike.

Although there are certain variations in the design and pattern of Nike footwear, the basic designs are all the same. However, to an extent, the differentiating factor would be Nike’s continual innovations for better product development. For instance, Air Jordan XX3 is the first basket ball shoe designed to embrace environmental principles without compromising on product performance. The product as such benefits the athletes and the environment. Barriers to Entry: The athletic footwear industry is a very competitive and mature market. The leaders of this industry are very well established.

Leaders like Nike, Reebok, and Adidas have made the industry what it is today. In order to have an edge over the leaders, companies must be able to compete at all levels such as reasonable pricing, efficient production, and high product quality. These things are difficult to achieve without the resources of an established manufacturer. Another key barrier to entry is the access of traditional distribution channels. Lesser-known brands are viewed by retailers as being too risky to replace an established brand name like Nike or Reebok on the shelf.

Thus, high startup costs, lack of distribution channels, brand equity and cutthroat environment hinder the entry of new competitors. Non Price Competition: In a monopolistically competitive market like that of footwear industry, there is just a slight difference between the products manufactured by various companies such as Nike, Reebok, Adidas, Puma etc. , and hence the companies rely heavily on non price competition. They mainly use advertising to flaunt their products and try to get consumers to buy their product over another.

The goal of product differentiation and advertising (non price competition) is to make price less of a factor in consumer purchases and make product differences a greater factor. There is a lot of non price competition among Nike and its key competitors with all of them trying to build their brand values through advertising, brand management, special orders, market research, and innovative product developments. Over years Nike has gained an enormous amount of consumer awareness and Nike’s brand images, including the Nike name and the trademark Swoosh, represent one of the most recognizable brands in the world.

Aggressive advertising campaigns, celebrity endorsements, and quality products enhance the brand power translating into bottom-line revenues. CHAPTER 4: MARKET DEMAND The reasons for the variation in the demand for Nike’s products depends on various demand shifters- Income, Prices of Related goods, Advertising & Consumer tastes, Population, Consumer expectations & Others. Since Nike has established a strong foothold in the athletic footwear and apparel industry and has immense branding, factors like prices of related goods and consumer expectations have very little effect on the demand for its products.

But the main factors that could influence demand are Income, Advertising and Consumer tastes and Population. Income: The change in income of consumers is directly proportional to consumer spending. During hard economic times, people consume less retail goods such as clothes and footwear. The Bureau of the Census estimates that retail and food service sales for January 2009 are 9. 7% below a year ago. The chances are that consumers will start to spend an increasing portion of their monthly income on household expenses and debt repayment, leaving fewer dollars to spend at retail.

In the absence of “must-have” products to drive sales, athletic footwear & apparel stores have to maintain profit margins through conservative planning and tightly managed expenses. Advertising & Consumer tastes: In a monopolistically competitive market that Nike operates in, product differentiation and non price competition play a major role. Greater spending on advertising is attributed to the power of branding and the larger the manufacturer greater the success of creating a strong and popular brand. Firms spend a great deal of money on advertising to try and increase the demand for their products and drive sales.

Fashion trends and tastes affect design trends and ultimately lead to demand sensitivities for certain footwear styles, for example the popularity of sporting activities affects sales in athletic footwear. Nike’s advertising and innovative marketing in the industry makes it extremely competitive. The only problems that Nike worries about are customers becoming less brand-loyal and buying cheaper brands. Nike is trying to make the point that it is worth spending more money on better quality made products, than buying a cheaper product that will only last a little while. Population: Demographics of the US population change demand factors.

For example, changes in birth rates affect sales in juvenile footwear. Changes in demographic trends such as an increase in couples with high disposable income hold off having children can see them spend more on luxury items which can positively affect the high fashion end of the industry. Companies mainly targeted the age group 18-40 yrs and so far they have been successful in selling their products to this age group. But this baby boomer generation is now entering their 50s and the natural aging processes would gradually force this generation to seek fewer physical activities. Nike derives 37. % of its revenues from the US market and the aging of baby boomers may adversely affect its sales. The net effect of these three main factors is mostly on the adult age groups 21-40 yrs. Variations in income leading to reduced spending, change in trends or preferences and aging have a direct and telling effect on this age group. Whereas, advertising and change in trends and customer tastes are predominant in the teens with age 16-20 yrs. This group would not be deeply influenced by income variations but could be inclined towards changes in fashion trends and can be swayed by aggressive advertising.

The observable variables for income would be household income or per capita income and the changes in population can be known through census reports. CHAPTER 5: MARKET SUPPLY The supply shifters are variables that shift the supply curve, and include the prices of inputs, the level of technology, the number of firms in the market, taxes and producer expectations. Although all have an effect on Nike’s supply curve, the major factors are prices of inputs, level of technology and number of firms in the market. Price of inputs: Most competitors of Nike like Reebok, Adidas etc. ll get their inputs from South Asian countries. The cheap raw material and labor costs help companies keep output prices low. Nike procures raw materials from wholly owned subsidiaries of Nike and independent contractors located in Asian countries. In addition to raw materials, Nike obtains finished products from contracted companies in South Asia and contract suppliers located in China, Vietnam, Indonesia and Thailand and independent factories in 36 other countries which manufacture footwear for the company to be sold in those countries.

With some Asian countries shifting to manufacturing electronic products or producing their own footwear and apparels at cheaper rates, the cost and availability of inputs is going up. In order to counter these affects Nike is looking to expand its procurements to other countries and suppliers. Technology: Technology and innovation is what drives the athletic footwear & apparel industry. Producing products that set the trend at cheaper costs using better technology is what gives a competitive edge to a company. Nike has always been able to continually innovate products to provide a good athletic experience.

Innovative products help attract new customers by meeting their hitherto unmet needs. With most other factors remaining constant, level of technology provides a platform for companies to experiment and differentiate their products from others. Number of Firms: Although the market is dominated by the leaders, with the top four firms holding 71% market share (Exhibit 3. 1), things may look different in the future. With the influx on cheap products from other countries including China and Indonesia, the demand for the high-priced goods of the top companies like Nike, Adidas is reducing.

Suddenly these companies are facing stiff competition from small time manufacturers and the number and reach of such firms has become all that more important. Hence, the number of firms in the market is being considered as an important factor affecting the supply of goods in the market. Nike looks to combat this threat by relying on its brand value and emphasizing on the quality of Nike’s products. CHAPTER 6: PRODUCTION Economies of scale: Nike is the market leader in the footwear and apparel industry with over $18. 6 billion in revenue in 2008.

Nike’s scale advantage principally manifests itself in low advertising costs. Scale reduces advertising costs because large brands are inherently recognizable, and because, with a large distribution network, a dollar spent on advertising improves sales in many stores. Nike’s brand-building activities also benefit from economies of scale: because Nike buys so much advertising, it pays less per unit than a company that buys only limited advertising in a local market. As a result, Nike’s cost of per unit of advertising is lower than others.

Moreover established retail groups like Nike wield significant economies of scale through bulk purchasing and pooling certain back office operations. Economies of scope: Nike enjoys economies of scope to a large extent. The various divisions and subsidiaries of Nike share most information and technology needed to succeed and they all share marketing, and distribution linkages. Nike’s builds upon or extends its core competency and resources and capabilities to create value. CHAPTER 7: PRODUCT ELASTICITY Price elasticity is the measure of how consumers react to a change in price of the commodity.

In this case, the various factors that influence price elasticity of Nike’s footwear are- available substitutes, time period, durability of product, expenditure share. Available Substitutes: The elasticity of demand for Nike’s footwear depends heavily on the availability of substitutes. Although Nike has a very wide range of footwear products, its competitors like Adidas, Reebok, Puma have footwear that are functionally similar to those of Nike. Apart from its main competitors, Nike’s footwear faces tough competition from cheap footwear manufactured by companies in China, Taiwan etc.

This brings in a lot of substitutes in to the market for Nike’s products. Also with people shifting to buying more casual and work boots and opting for more medium to lower priced footwear, Nike’s products are facing a lot more substitutes than ever before making the demand for Nike’s footwear that much more elastic. Time period for adjustment: The time available for adjusting to a change in price makes demand of Nike’s footwear more elastic. For instance, a customer X wanted to buy some shoes from Nike, but when he reaches the Nike store he finds out that the price for those shoes has raised and is out of his budget.

Then, he has numerous other options to fulfill his needs. Since Nike has quite a few substitutes, he can look for a similar pair of shoes at other stores like Adidas, Reebok etc. or he could even delay buying the shoes and purchase it at later date. Durability of product: People usually buy new pair of shoes in two scenarios- when existing shoes have worn out or they want to buy the latest trendy pair of shoes. When one wants to buy a new pair of Nike shoes to replace old ones, an increase in price might force him to buy shoes from Nike’s competitors.

And when a person wants to buy the latest pair of shoes from Nike to keep up with fashion trends, he might think of not buying it when the price of shoes has increased. He has the option of buying it later since his present pair of shoes is still durable. That said, in general, durability of products makes the demand for Nike’s footwear elastic since people can look for other options or procrastinate buying shoes when prices are raised. Expenditure share: The percent of consumer’s budget plays a major role in determining elasticity of Nike’s products.

Larger the share in the consumer’s budget more elastic the demand will be. It can be safely said that Nike’s footwear would take up a relatively small percentage of consumer’s budget, and hence would make the demand for Nike’s footwear inelastic. However it can be noted that in the current economic situation, people have been cutting back on spending and since Nike’s footwear would not fall under the “must have” category of the consumers, chances are that increased prices could make push consumers to shift to other cheaper substitutes or completely restrain from spending on shoes making the demand elastic.

All of the factors mentioned above would have an immediate effect on the adult age group of 21-40 yrs, since they would be more cautious about their spending unlike the teenage group of 16-20 yrs who would be more conscious about fashion trends and would not mind shelling out more. Pricing power: The market for sporting goods is intensely competitive in the US and across geographies. Nike competes internationally with a large number of athletic and leisure shoe companies with diversified lines of athletic and leisure footwear and apparel.

Since Nike operates in such a monopolistically competitive market, it has very little pricing power. If Nike decides to raise prices, some customers may still remain loyal to them and continue to purchase its footwear but some others may switch to other brands. Intense competition and availability of cheaper products puts pressure on the price of products and therefore adversely affect Nike’s margins which could also lead to a loss of market share for the company. Thus Nike would first look at building its brand value through advertising and then exercise its pricing power.

CHAPTER 8: ANTITRUST Nike Inc. had several lawsuits filed against it for ill treatment of its employees at “sweat shops” in South Asian Countries like China, Indonesia and some other lawsuits for alleged physical and sexual abuse by its mangers; but it does not have any significant ‘antitrust’ cases against it. So let’s focus on an antitrust case against Intel Corporation. Intel, based in Santa Clara, California, designs, manufactures and sells a variety of semiconductor products having annual worldwide sales of approximately $20. billion, with around 80% market share in the microprocessor industry. In June 1998, the Federal Trade Commission charged that Intel Corporation used its monopoly power to reinforce its dominance over the microprocessor market. The FTC alleged that Intel illegally used its market power when it denied three of its customers continuing access to technical information necessary to develop computer systems based on Intel microprocessors, and took other steps to punish them for refusing to license key patents on Intel’s terms.

These three companies- Digital Equipment Corporation, Intergraph Corporation and Compaq Computer Corporation, hold important patents on microprocessor and related technologies. When they sought to enforce those patents against Intel or other computer companies who buy Intel products, Intel retaliated by cutting off the necessary technical information and threatened to cut off the supply of microprocessors.

The complaint also said Intel was getting preferential access to the technologies of other firms and competitors cannot obtain comparable access to technology making it more difficult for companies to challenge Intel’s dominance. A computer maker’s inability to enforce its patent rights makes it more difficult to develop and maintain a brand name based on superior technology This was a good case to study about how monopoly firms can use their power to create barriers of entry and subdue competitors to maintain their position. The final decision taken on this case is quite interesting.

Under the un-disclosed settlement, Intel is still permitted to withhold product information and samples from customers who seek a court order prohibiting the sale, use, and manufacture of Intel chips. My personal opinion is, Intel does not really enjoy a monopoly in the microprocessor industry and given the circumstances, Intel was doing the right thing by protecting its position in the market. Just because information was withheld from companies should not cause a reduction in competition and take away the incentive to develop new microprocessor technologies.

CHAPTER 9: EXHIBITS Exhibit 1. 1 . Nike revenue by business segment Exhibit 1. 2. Nike revenue by geographic region Exhibit 1. 3. Global market share CHAPTER 10: REFERENCES •http://en. wikipedia. org/wiki/Nike,_Inc. •http://www. ibisworld. com. libproxy. sdsu. edu/industry/keycompetitors. aspx? indid=369 •http://global. factiva. com. libproxy. sdsu. edu/pcs/default. aspx •http://www. nike. com/ •http://phx. corporate-ir. net/phoenix. zhtml? c=100529&p=irol-irHome •http://www2. ftc. gov/opa/1998/06/intelc. shtm •www. nikebiz. com/

Cite this Nike- an Ecnomic Report

Nike- an Ecnomic Report. (2018, Jan 30). Retrieved from https://graduateway.com/nike-an-ecnomic-report/

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