Analysis of Nike - Case Study PDF

Preview

Summary

Case Study...

Description

COMPANY INTRODUCTION Company History 1950-59: Bill Bowerman, a track coach at the University of Oregon was always seeking ways to give his athletes a competitive advantage. He experimented with track surfaces, re hydration but most importantly, running shoes. Phil knight was a one of the athletes performing for Bowerman on the track team and used his knowledge from his MBA in finance to take a proposal of running shoes to Onitsuka, manufacturing of Tiger shoes and to make him a distribute. Knight took the shoe samples to Bowerman hoping to sell, but instead Bowerman asked him to become a partner and initiate footwear designs to send to Tiger; and the partnership began. 1960-69: In 1964, Bowerman and Knight shook hands with Blue Ribbon Sports where they sold their innovative shoes of Tiger, whilst Bowerman was ripping them apart trying to see how they could make them lighter and better. As Bowerman and Knight each had full time jobs, they decided to hire Jeff Johnson as their first employee in 1965 and the company was starting to work up. 1970-79: Johnson became a very useful man as he overlooked marketing, mail order system, opening up another branch as well as coming up for the name Nike in 1971. At this time, BRS and Onitsuka wanted to part as Nike was ready to become a manufacturer of shoes and not just a distributor. They started with a new innovative shoe from a sole and a waffle iron that seemed to make a great impression, Around this time, the „swoosh‟ originated and Nike was off to flying start. All they needed was someone to endorse their shoes. That person was Steve Prefontaine who electrified the stands from 1969 to 1973 during his college career. With exposure over Sports Illustrated and becoming an Ambassador of the company, he distributed the new creative news to many top track athletes with personal notes of encouragement. He was a great asset to the company and known as the „Soul of Nike‟. 1980-89: In late 1980, Nike offered its IPO, however this transition phase was hindered as some of the early pioneers decided to move on elsewhere. Even Phil Knight removed himself as President and become the CEO and chairman of the board. In the mid 80‟s, Nike slipped as the industry leader, luckily however, they decided to endorse Michael Jordan, which was a huge boost for Nike. In 1987, Nike‟s marketing revolution began with their new Air Max shoes and their memorable TV ad featuring the Beatles song Revolution with the tag line „Just do 1

it‟ coming shortly after. By 1989, Nike had regained its position as industry leader and never let it go since. 1990-99: Nike opened their headquarters in Oregon, with soccer and golf being their desired sports to excel in. They signed some magnificent players from the Brazilian national team and then decided to sign the whole team in 1995. More importantly, they signed arguably one of the best athletes of all time in any sport in 1996, Tiger Woods. Competitors laughed at Nike for signing him for $5 million dollars until he won the masters by 12 stroked in 1997. 2000-present: Nike opened up the millennium with Nike Shox resulting in cushioning and stability which landed them a gold standard in the industry. Just as Nike‟s products have evolved, so has Nike‟s approach to marketing. The 2002 “Secret Tournament” campaign was Nike‟s first truly integrated, global marketing effort. Departing from the traditional “big athlete, big ad, big product” formula, Nike created a multi-faceted consumer experience in support of the World Cup. At an investor meeting at its world headquarters in June 2011, NIKE, Inc. announced an increase to its fiscal 2015 revenue target to a new range of $28-30 billion, up from its previous target of $27 billion announced in May 2010. The company also increased its fiscal 2015 revenue target for the NIKE Brand to $2425 billion, up from its previous target of $23 billion. Mission:

Vision: ways we will achieve this goal is to find avenues to reach our long-term vision of decoupling profitable growth from constrained resources.” Objectives obal sportswear market

2

-digit revenue growth (average annual rate), Mid-teens Earnings Per Share growth (average annual rate), Return on Invested Capital of 25%, Increasing dividends within a target calendar year payout range of 25-35% of trailing four quarter earnings per share

Appendix A - External Analysis The industry I will be analyzing is the men‟s and women‟s sportswear industry. 1. Strategically Relevant Factors in the Macro-Environment (PESTEL Analysis) 1.1 Political -Globalization makes it easier for consumers to seek products from international markets and companies to enter new geographic markets Diversification of production plants reduces the risk that a firm will greatly be affected by a problem in any particular country 1.2 Economic -Sportswear is more concentrated than the overall apparel and footwear market. -This trend strengthened over the review period, and the combined share of the top 10 global players rose from 33% in 2008 to 37% in 2013. -State of the economy greatly impacts leisure goods such as sportswear 1.3 Socioeconomic -Consumers are looking to buy products that allow for exercise and healthy living -Consumers are becoming more and more aware of unethical practices of manufacturers including practices such as child labour and sweatshop usage 1.4 Technological -New technology is constantly being developed to improve products, top companies employs many specialists including engineers, athletes, biomechanics, and industrial designers to work together in the design process -Ecommerce and online shopping continues to allow the industry to grow 1.5 Environmental -Environmentally friendly products are becoming of increasing importance to consumers, -Many of the products are being manufactured in China, Singapore and Thailand using large factories, that are very damaging for the environment 1.6 Legal -Players in this industry outsource to third-party contractors in countries including China, Indonesia, and Vietnam. Government legislation regulating factories or an increase in input costs, especially labor costs 3

Implications: The industry is continuing to grow internationally. This tool indicates that this industry will remain profitable for all its major market share holders for the next several years. Globalization is helps the international brands expand worldwide, and this combined with the general trend towards healthy living looks to be very favourable for this industry‟s key players.

2. Industry Economic Traits 2.1 Market Size and Growth Rate

ion in US alone.

2.2 Number of Buyers accounts for a significant fraction of overall market demand. All ages and genders are buyers in this industry. 2.3 Buyer Needs and Requirements Nike, Under Armour and Adidas to maintain competitive advantage over smaller competitors 2.4 Numbers of Rivals players are Nike, Under Armour and Reebok, there are also smaller independent rivals such as ASICS and counterfeiters. 2.5 Degree of Product Differentiation becoming less differentiated. “Look-alike” products or rivals are causing heightened price competition. 2.6 Product innovation

4

improve their products and make them make they more adaptable to the different sports and overall health and exercise 2.7 Pace of Technological Change efficiency in their production process while ensuring that they are respecting human rights which has become more of an issue as human rights violations surface. 2.8 Vertical Integration of the developing world to take advantage of the cheap labour costs. 2.9 Economies of Scale are the major activities as the products, especially athletic shoes are manufactured using very cheap labour and sold for much higher prices, getting very high margins per shoe. Implications: The industry is looking very strong and conducive to continued growth for the major industry players. Globalization makes potential for economic growth in this industry enormous and the number of buyers remains plentiful.

3. Key Success Factors 3.1 Ability to make new and innovative products o Without this, companies will lose repeat customers and lose market share to more innovative competitors 3.2 Brand recognition and reputation o Crucial for customers to be willing to pay high price for product 3.3 Expansion into global markets o Key determinant for growth as North America is already very saturated 5

3.4 Ability to market effectively in DTC platforms o Needed to bind the customer to the brand or will lose customers to competitors

4. Strength of the Industry Competitive Force Porter’s 5F’s

4.1 Threat of New Entrants Low -In order to pose a real threat to the industry‟s main players, there would need to be significant capital investment in order to establish distribution and supply chain management internationally

4.2 Threat of Substitute Products Low to medium -Only real threat comes from counterfeit products which has been improving steadily over the years and has threatened to dilute brands and have consumers with no desire to find the authentic

4.3 Competition From Rival Sellers Medium to High -The global market for athletic footwear, apparel and equipment has intense competition, the main competitors are Adidas, Under Armour and Nike. -Constant changes in consumer preference forces companies to adapt quickly or risk losing market share

4.4 Bargaining Power of Suppliers Low -Sportswear and athletic shoes are manufactured by third-party contract manufacturers.in developing countries, including Vietnam, China, Bangladesh and Indonesia -Costs of changing suppliers is significant.

4.5 Buyer Bargaining Power Low to Medium -Companies in just industry use wholesale and direct-to-consumer channels -Major competitors have strong brand reputation which keeps customers intrigued -Customers do have the choice between elite brands and could switch between top recognized brands if price, style

Implications: This tool indicates that this industry is conducive to high profitability. For the foreseeable future, competition will remain among the top industry players.

6

5 Driving Forces 5.1 Changing societal concerns, attitudes and lifestyles o People are choosing healthier lifestyles o Women particularly are now buying sportswear 5.2 Product and marketing innovation o Constant battle among competitors to have the most innovative gear o Use of athlete sponsorship becoming prominent- battle for top athletes 5.3 Increasing globalization o International markets are becoming more and more appealing and barriers to entry are getting less and less and there is a growing middle class in places like China As a whole, these driving factors are causing the demand for the industry‟s product to increase. The combined impacts of the driving forces are leading to higher profitability for industry competitors. Strategies of industry players need to continue to take advantage of the consumer interest being active and wearing the most innovative sportswear.

6. Strategic Group Map Strategic Map Analysis Where is the best spot? The best spot on the map to be is the top right section because the company that is closest to that area will be able to demand the highest price for their product and as a result, have the best margins.

Which companies are destined to prosper? Due to the current industry outlook, all companies are able to prosper. The most profitable will be the industries that are able maintain a high quality of their product. 7

Which companies are destined to struggle? Under Armour will struggle unless it is able to increase their brand awareness and convince consumers that it is able to deliver as high quality and trustworthy product as Nike and Adidas

What accounts for why some sections of the map are better than others? The bottom right section of the map may be better because companies in that section of the strategic map will likely be able to sell a higher volume of their product because they are piggybacking off the established brand names but charging a much lower price.

7. Framework for Competitor Analysis Implications: Competitors pose a strong threat to profitability of Nike. With the global market opening up more and more, and with a growing middle class in markets such as India and China, there will be much room for growth by top industry players.

8

Nike Current Strategy -Nike is the leader in value share of the market (15%) -Competitive advantage lies in their brand recognition and awareness Nike Invests significantly in product innovation

Objectives

Focused on maintaining their high rate of product development and increasing their DTC sales

Capabilities

Strengths – Nike has an incredibly strong brand and tech reputation that justify high price of products Weaknesses- Highly dependent on third party sellers

Assumptions

Will be able to extend into China, Nike is currently struggle to get into Chinese market but are trying

Adidas Adidas has a significant value share of the market (10.8% ) global brand key marketing sport in most global markets. It has strong ties throughout the sport, notably with world governing body FIFA. Investing heavily in more retail space and innovation Key objectives are to maintain segmented position, grow retail share, keep up innovation pace Extremely strong brand portfolio, strong multi-brand strategy which allows is to operate at almost any point in the market Weaknessesextremely dependent on third party retailers, Will be able to create such high quality products that it will not be threatened by counterfeiting

Under Armour Under Armour has 1.1% value share of the market Looking to make strong gains in women‟s sportswear, have invested heavily into its creative talent with women‟s product Currently meeting their objectives and growing in terms of sales, but they still need to improve their brand awareness considerably Strengths- perceived as an athlete-oriented producer. Has a high level of credibility Weakness- Lacks the scale that Nike and Adidas have in manufacturing will be able to maintain their quality that gives them such a great reputation as they expand

9

8. Industry Outlook This industry outlook is conducive to high profitability. The macro-environment shows that companies in this industry are subject to the legal constraints of the countries in which they outsource to but overall the socioeconomic factor that is causing people to value their health and living a healthy lifestyle is conducive to great overall profitability. This industry is extremely saturated with competition but it is not squeezing profitability, instead it is increasing because consumers are not very price sensitive and rival companies are pushing each other to constantly create innovative products which can command a high price. The industries‟ profitability will be favorably impacted by the driving forces because there can be significant growth expected as companies are able to expand into new markets across in the world that have disposable income. This will continue to be a challenge for companies, but as technology advances, products will be more difficult to knockoff. Nike occupies the strongest market position in the industry because their brand awareness and reputation for high quality products is unmatched. This position is not likely to change because Nike has developed this reputation over decades and it is difficult to replicate. The threat of new entry is weak because of the tremendous capital investment that is required to set up the distribution and manufacturing channels necessary to compete in this industry. Nike has been able to deliver on the key success factors considerably with the exception of their ability to get into foreign markets, they are currently having much more difficulty than their competitors in getting into China and other major markets in Asia.

Appendix B- Internal Analysis 9. Financial Analysis

10

US$ in millions 12 months ended Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Selling and administrative expense Operating income Interest income Interest expense Interest income (expense), net Other income (expense), net Income before income taxes Income tax expense Net income

May 31, 2019 39,117 (21,643) 17,474 (3,753) (8,949) (12,702) 4,772 82 (131) (49) 78 4,801 (772) 4,029

May 31, 2018 36,397 (20,441) 15,956 (3,577) (7,934) (11,511) 4,445 70 (124) (54) (66) 4,325 (2,392) 1,933

May 31, 2017 34,350 (19,038) 15,312 (3,341) (7,222) (10,563) 4,749 27 (86) (59) 196 4,886 (646) 4,240

May 31, 2016 32,376 (17,405) 14,971 (3,278) (7,191) (10,469) 4,502 12 (31) (19) 140 4,623 (863) 3,760

May 31, 2015 30,601 (16,534) 14,067 (3,213) (6,679) (9,892) 4,175 6 (34) (28) 58 4,205 (932) 3,273

May 31, 2014 27,799 (15,353) 12,446 (3,031) (5,735) (8,766) 3,680 5 (38) (33) (103) 3,544 (851) 2,693

Based on: 10-K (filing date: 2019-07-23), 10-K (filing date: 2018-07-25), 10-K (filing date: 2017-07-20), 10-K (filing date: 2016-07-21), 10-K (filing date: 2015-07-23), 10-K (filing date: 2014-07-25).

11

Income statement item Revenues

Description The company Amount, including tax collected from customer, of Nike Inc.‟s revenues increased from 2017 to 2018 and revenue from satisfaction of performance obligation by from 2018 to 2019. transferring promised good or service to customer. Tax collected from customer is tax assessed by governmental authority that is both imposed on and concurrent with specific revenue-producing transaction, including, but not limited to, sales, use, value-added and excise.

Operating income

The net result for the period of deducting operating expenses from operating revenues.

Income taxes

before

income Amount of income (loss) from continuing operations, including income (loss) from equity method investments, before deduction of income tax expense (benefit), and income (loss) attributable to no controlling interest.

Nike Inc.‟s operating income decreased from 2017 to 2018 but then increased from 2018 to 2019 exceeding 2017 level. Nike Inc.‟s income before income taxes decreased from 2017 to 2018 but then increased from 2018 to 2019 not reaching 2017 level.

Nike Inc., short-term (operating) activity ratios Net income Inventory turnover Receivables turnover Payables turnover Working capital turnover

The portion of profit or loss for the period, net of income Nike Inc.‟s net income decreased from 2017 to 2018 but taxes, which is attributable to the parent. then increased from 2018 to 2019 not reaching 2017 level. An activity ratio calculated as cost of goods sold divided Nike Inc.‟s inventory turnover ratio improved from by inventory. 2017 to 2018 but then slightly deteriorated from 2018 to 2019. Nike Inc.‟s receivables turnover ratio improved from An activity ratio equal to revenue divided by receivables. 2017 to 2018 but then deteriorated significantly from 2018 to 2019. An activity ratio calculated as cost of goods sold divided Nike Inc.‟s payables turnover ratio decreased from by payables. 2017 to 2018 and from 2018 to 2019. An activity ratio calculated as revenue divided by working Nike Inc.‟s working capital turnover ratio improved capital. from 2017 to 2018 and from 2018 to 2019.

12

Figure 1: Nike Inc., consolidated income statement, US$ in millions

Figure 2: Nike Inc., consolidated income statement, US$ in millions

13

Figure 3: Nike Inc., short-term (operating) activity ratios

Figure 4: Nike Inc., short-term (operating) activity ratios 

Source of (Figure 1-4) : Stock Analyses on Net, Financial statements analysis and common stock valuation, link: https://www.stock-analysis-on.net.

14
...