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Nike’s Core Competency Team innovIIXrs

Morgan McGrath

Pam Barrington

Jason Cumiford Dan Hockaday Tran Pham BMBA-523 Pacific Lutheran University 2.29.16 1

Nike’s Core Competency

1.0 Executive Summary 1.1 Background & Issues Today, not only do firms need to keep up with the innovative environment, the passage of time has long urged them to find ways setting itself from the threats of rivalry. Besides a thorough understanding of the external environment, regarding to industry structure, competitive forces, and strategic groups, firms also need to evaluate its strengths and weaknesses (Rothaermel, 2015, p.99). This knowledge should help them to sustain its position within the industry as well as make a crucial impact on its success. Born roughly twenty years after Adidas, once was the world’s largest athletic shoe company, Nike has now made its way to own 60 percent market share, leading the athletic shoe and apparel industry (Adidas Group History; Rothaermel, 2015, p.97). Nike’s achievement represents the idea of excelling a strong marketing strategy by mythicizing the everyman. However, the firm also faces a challenge when several of its product representatives committed wrongdoing acts, crimes, and scandals. In order to sustain its success, Nike needs to take some suggestive actions to keep its true value and avoid failures. In this case write-up, team InnovIIXrs will analyze the importance of identifying core competencies in firms’ success as well as a set of recommendations for Nike to stay in the game. 1.2 Analysis Firm’s managers often evaluate a set of competitive advantage, such as capabilities, core competencies, and activities based on the VRIO framework to evaluate its position in the industry. This framework includes a comprehensive assessment answering to a set of questions in regard to valuable, rare, costly to imitate, and organized to capture value. Managers would use this information to make a decision “upon formulating and implementing strategy” (Rothaermel, 2015, p.105). In addition, another concept that managers often deploy to determine its strengths and weaknesses is SWOT analysis. This tool helps managers to estimate the firm’s present value as well as predict the future prospects. Although SWOT analysis can act as an instrument delivering a strong internal analysis, firms’ strengths could also be weaknesses, and opportunities could sometimes create threats (Rothaermel, 2015, p.119).Thus, along with implementation of SWOT analysis, a thoughtful strategic alternative is also crucial to managers. 1.3 Conclusion By understanding the position within the athletic shoes and apparel industry, strategically, Nike has differentiated itself from other competitors through a well-analysis of value and cost (Rothaermel, 2015, p.98). Nike’s success strongly explains the importance of core competencies, internally making up a company’s competitive advantage. However, there are also negativity in every strategies, in this case, the stars’ scandals and crimes often push Nike’s marketing strategy off track. In order to sustain its competitive advantage, team InnovIIXrs suggests that Nike should follow the redefining of heroes guiding policy. This policy would ensure that Nike can keep up with the innovative environment, its industry rivalry, as well as create a strong emotional brand attachment backed up its strong customer base.

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TABLE OF CONTENTS 1.0 Executive Summary…………………………………………………………………..……….2 1.1 Background & Issues…………………………………………………………..……...2 1.2 Analysis……………………………………………….……………………...……......2 1.3 Conclusion……………………...……………………………………………………..2 2.0 Introduction…………………………………………………………………………………....4 2.1 Case Background ……..……………………………………………………………....4 2.2 Diagnose the Problem……………………………..…………………………………..5 2.3 Analysis……………………………………………………………………....………..5 3.0 Case Questions…………………………………………………………………….…………11 3.1 Question #1…………………………………………………………………………..11 3.2 Question #2…………………………………………………………………………..12 3.3 Question #3…………………………………………………………………………..12 3.4 Question #4…………………………………………………………………………..13 4.0 Recommendations………………………………………………………………….………..13 4.1 Guiding Policy #1……………………………………………………………………13 4.2 Guiding Policy #2……………………………………………………………………14 5.0 Managerial Implications……………………………………………………………………..16 6.0 Case Update………………………………………………………………………………….17 7.0 References..………………………………………………………………………………….19

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2.0 Introduction 2.1 Case Background “Just do it.” Everyone knows this saying, and the symbol that goes along with it. Nike has created brand recognition and has been able to gain and sustain competitive advantage. But how did Nike get there? How are they able to sustain their competitive advantage? What strategic moves allowed them to get there? Nike has come a long way since its beginnings. The company was founded by Bill Bowerman and Phil Knight in 1964 and was originally named Blue Ribbon Sports. The company was renamed in 1971, and the infamous “swoosh” was created by a Portland State University student. Bowerman was a true innovator by consistently seeking ways to enhance running performance. Knight was completing his MBA at Stanford and wrote a paper about how to disrupt the (at the time) leading shoe maker Adidas. In 1971, the company hired a Seattle advertising agency which helped create the first “brand ad” called “There is no finish line” where no Nike products were shown. By 1979, Nike had captured more than 50 percent market share for running shoes in the US and a year later the company went public. Through the 1990’s and 2000’s Nike sponsored superstars in a variety of sports. This closely held sponsorship led to the idea of “creating heroes.” Nike picked many superstar athletes that challenged the odds of success through defeating cancer and coming from disadvantaged backgrounds. This strategic alignment and core competency allowed Nike to be very successful, but the strategy also has many risks. Some of Nike’s “heroes” have “fallen” through wrongdoings or crimes. Will Nike’s alignment of creating heros and then falling heros cause Nike’s brand to fail?

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2.2 Diagnose the Problem Nike has focused on sponsoring many sport superstars and was able to endorse a variety of athletes in a wide range of sports. This closely held sponsorship led to the idea of “creating heroes.” Many of the athletes that Nike sponsored were athletes that had defeated the odds of failure- from defeating cancer to coming from a disadvantaged background. The problem with this idea of “creating heroes” is that it is a slippery slope. What happens when you mythicize the everyman? Everyone is human and flawed. When Nike’s heroes are unmasked as cheaters, criminals, or frauds the company has to attempt to sidestep or anticipate the backlash and the affect it could have on the brand. Nike has placed too many eggs in the hero’s basket which could eventually reach the tipping point of being associated with too many fallen heroes. 2.3 Analysis The fragile nature of hero creation appears to leave Nike in a vulnerable position moving forward. Maintaining a core competency centered on the elevation of athletes to heroic stature, leaves the company open to the possibility of a devastating fall from grace by these heroes in the eyes of the public. With the likes of Tiger Woods, Oscar Pistorius, and Kobe Bryant, Nike was able to sidestep the public relations storms that followed. The concern from a managerial standpoint is that without innovative upgrades to the core competency of the firm, there exists a chance that a scandal might occur that will be massive enough to tarnish Nike’s image right along with the athlete in question. With the diagnosis in place, the next step is to analyze the setting of Nike’s current core competency and to propose a guiding policy to solve the problems the company faces. The specific innovation management theories that will be employed to complete the analysis are the AFI strategy framework, the VRIO framework, and Porter’s Five Forces. With an assessment

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through these lenses of where Nike excels, and where there is room for growth, a comprehensive strategy for innovation can be formed. To begin, we must examine the setting of the original core competency of Nike as well as its most recent core competency and the role they have played in giving competitive advantage to Nike over its rivals Adidas and Reebok. Early in Nike’s existence, Knight and Bowerman were able to innovate the style and function of its shoes and apparel to set itself apart from rivals (Rothaermel, 2015, p. 97). This component innovation led to competitive advantage as the products Nike offered were not initially easy to replicate or imitate. Unfortunately for Nike, the component innovation only led to temporary competitive advantage as Reebok and Adidas began to seek ways to update their products style and functionality as well. Competitive parity was created by this limit to component innovation. In an effort to combat this declining advantage, Nike needed to alter its original core competency of designing innovative products. The first of the innovation management tools to come into play can introduced here as Knight and Bowerman sought ways to regain competitive advantage. The AFI framework appears to be the perfect lens to apply to as its Analysis, Formulate, and Implement steps were used to alter the core competency of Nike. Knight and Bowerman’s first step was to analyze the current state of the market in which their company operated, and come up with possible future scenarios. The two most clear among these scenarios were that Nike would continue to focus on product enhancements and component innovation, and that it would focus on putting its apparel and footwear into the public view by endorsing athletes who would wear the product. The problem with these future scenarios as they stood, were that component innovation was incremental, and as time went on, without radical innovation the advantage gained from shoe and clothing upgrades would be temporary and limited. The issue with the second scenario is that is

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enforced the status quo in the industry. Endorsement contracts where pro athletes were encouraged to wear products as they competed in their sports was common among all three major companies. While it was important for Nike to maintain endorsements to keep up with Reebok and Adidas, there was no measurable competitive advantage being gained. The next step within AFI was to formulate a strategies to change the landscape of competition within the market. Of the two scenarios being examined, the first of component innovation could only be upgraded as quickly as technology for building components grew. The second scenario of endorsements was where the real opportunity for innovation existed. This took the form of using endorsements not only to give exposure to the products they were selling, but to highlight the stars wearing the products themselves. The implementation portion of this strategy was made manifest through the concept of hero creation, elevating athletes to higher levels than that of merely stars on the field or court. The first major step in this strategy came with the initial “hero creation” endorsement for Nike, the contract they signed with Michael Jordan in 1984 (Rovell, 2013). The emphasis that Nike placed on highlighting Michael Jordan’s early failures in high school sports, his successful college career, and star power as he entered the NBA were far more impactful than previous endorsements. The harrowing story of perseverance against the odds Nike was able to tell pushed Jordan into not only the spotlight in the eyes of sports fans, but helped to make him into a household name and cultural icon. While in retrospect a shift from one type of endorsement deal to another might not seem groundbreaking, the actions taken by Nike in the mid 1980’s were disruptive to the status quo of the industry. With the meteoric rise of Michael Jordan, Nike was able to push its basketball shoes and apparel both onto the amateur basketball player and the casual fan. Expanding its base in the Basketball sector was a huge first

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step, but following the success of the hero creation strategy, Nike began to look for opportunity in other sports as well. This was accomplished through contracts with Tiger Woods for golf products, Lance Armstrong for cycling, Oscar Pistorius for track and field, and Kobe Bryant as a successor to Jordan for basketball. Through this approach, brand equity became a driving force behind the success of Nike within the market. With intangible resources like brand equity from the visibility of its “heroes” Nike had built a powerhouse in its core competency that allowed it to outperform its competitors on a yearly basis. The success of this new paradigm can be properly examined through the second innovation management lens, the VRIO framework (Rothaermel, 2015, p. 105). The tenants of VRIO suggest that for the resources of a company to lend competitive advantage they must be valuable, rare, costly to imitate, and that the firm must be organized to capture the value of the resource. These hero creation stories were valuable in that they aided Nike in marketing its products to the casual fan as well as the sports enthusiast. They were rare in that authentic stories of “ascension to greatness against the odds” could not be easily replicated by other companies. The idea that this sort of brand equity could be costly to imitate was also apparent, because the brand equity Nike had created took decades, and several campaigns to gain the market share they had. Finally within VRIO, Nike had preexisting coordination between its capabilities and resources to take advantage of the competitive advantage that the hero creation strategy gave them. The shift in marketing paradigm was able to effectively be capitalized on with the plants, distribution, and capabilities already in place within the company. The core competency it had formed was working famously, and only appeared threatened when the image of its heroes became tarnished. The falls from grace referred to in the case came

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in the form of infidelity with Kobe Bryant (Johnston, 2004) and Tiger Woods (Zinser, 2013), performance enhancing drug use with Lance Armstrong (Linden, 2013), and even more serious accusations like murder in the case of Oscar Pistorius (Curnow and Pearson, 2013). The issue created by the scandals is that when the intangible resource of brand equity was weakened by bad publicity, the “Value” tenant of the VRIO framework lessens. Each time another scandal arose related to one of the heroes it had created, brand equity for Nike suffered. Considering this fatal flaw in the “hero creation” strategy, our team decided it would be wise for Nike to again consider innovative actions related to its core competency. The third innovation management concept, SWOT analysis, would be helpful for Nike in deciding how to move forward (Rothaermel, 2015, p.117). The concept of SWOT seeks to outline the strengths, weaknesses, opportunities, and threats a company faces both from within and without. The strengths of its current model of hero creation are that by emphasizing not only its products but the stars who wear them Nike is able to create value in its products independent of the quality of the products themselves. The weakness inherent in this approach is that when reliance is too heavy on the image of a sports star, any bad publicity can weaken the advantage the endorsements provide. Additionally, the marketing driven approach that is currently being used creates a lag in component innovation, allowing competitors to close the gap in that area of advantage. Opportunities that exist outside of the current framework however that would allow Nike to improve its current approach. To offset the damage causing potential of single star endorsements, Nike has the opportunity to highlight teams as a whole, amateur sports athletes, and focus on viral video advertising with virtually unknown athletes who show the sort of potential Nike is focused on spotlighting. Threats to Nike appear to be the potential for a public relations disaster that cannot be recovered from, and the lack of component innovation. The

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likelihood of impact of these threats can decreased if the strength of its marketing power are leveraged are used to quickly shift away from the idolatry of stars to its new paradigm of defining amateur athletes and whole teams as heroic. If the SWOT analysis is employed by Nike management, and if our diagnosis is to be believed, Nike should innovate its marketing approach by shifting the way it uses its endorsement deals and elevation of individual stars, and it look into new and unique places for its next “hero”. With concerted effort toward identifying heroic qualities in amateur athletes, and using their accomplishments in concert with the successes of the endorsement giants they have contracts with, Nike can bridge the gap between the everyman and the hero. This relatability can also offer the potential to lessen the shock of any scandalous revelations that may come to light about currently endorsed heroes that Nike has created. On the production innovation side we believe that Nike needs to ensure that they continue to at least marginally innovate the apparel and equipment they offer to increase the gap between Nike products and competitors such as Reebok and Adidas. This can be accomplished by focusing on innovations both to the apparel and shoes, as well as technological integration with accessories. SWOT Analysis

Helpful

Harmful

Internal

Strengths: -Established as number one footwear seller in the world. -High brand equity based on current competency. -Major foothold in basketball and football with licensing contracts

Weaknesses: -Contracts terminated with Pistorius and Armstrong. -Lack of drastic component innovation.

External

Opportunities: -Viral Marketing -Amateur Sports -Team endorsement

Threats: -Reebok and Adidas catching up in component innovation. -Potential future scandals involving endorsed athletes.

3.0 Case Questions

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3.1 Question #1: The case indicates that Nike’s core competencies is to create heroes. What does this mean? How does Nike build its core competency? Does it obey the VRIO attributes? Nike has based its core competencies in creating heroes out of some of the popular athletes of our time. This strategy calls for the identification of an athlete relatable to the general public who is then, through careful advertising campaigns, portrayed as an almost godlike figure. Individuals have been carefully selected from various sports with the sole intention of turning them into an Icon (Peter, 2015). Since the early days of Nike, some of these ad campaigns highlight the hardships and roadblocks that athletes have overcome in order to solidify their status as something greater than the average man. In the case of Nike and its heroes all of the VRIO attributes seem to be followed. Each Hero is handpicked from a pool of coveted athletes. This allows Nike to exploit a resource that is not available to its competitors thus rendering them less of a threat. The rarity of the hero is high as no other company or firm has access to them in the way that Nike does. Each Hero’s contract makes them an exclusive resource for Nike. The idea of procuring a highly skilled and well known athlete to represent the company or product is in essence imitable. Yet, in this instance the imitations may or may not match the skill level being exploited by Nike. Nike is well organized to support and exploit its valuable resources allowing them to sustain competitive advantage and dominate the mark...