What business model and strategies is Nike pursuing? 1 answer below »
Nike’s Winning Ways
Nike, headquartered in Beaverton, Oregon, was founded over thirty years ago by Bill Bower man, a former University of Oregon track coach, and Phil Knight, an entrepreneur in search of a profitable business opportunity. Bower man’s goal was to dream up a new kind of sneaker tread that would enhance a runner’s traction and speed, and he came up with the idea for Nike’s waffle tread after studying the waffle iron in his home. Bower man and Knight made their shoe and began selling it out of the trunks of their car at track meets. From this small beginning, Nike has grown into a company that sold over $12 billion worth of shoes in the $35 billion athletic footwear and apparel industries in 2004.28 Nike’s amazing growth came from its business model, which has always been based on two original functional strategies: to create state-of-the-art athletic shoes and then to publicize the qualities of its shoes through dramatic guerrilla-style marketing. Nike’s marketing is designed to persuade customers that its shoes are not only superior but also a high fashion statement and a necessary part of a lifestyle based on sporting or athletic interests. A turning point came in 1987 when Nike increased its marketing budget from $8 million to $48 million to persuade customers its shoes were the best. A large part of this advertising budget soon went to pay celebrities like Michael Jordan millions of dollars to wear and champion its products. The company has consistently pursued this strategy: in 2003 it signed basketball star LeBron James to a $90 million endorsement contract, and many other sports stars, such as Tiger Woods and Serena Williams, are already part of its charmed circle. Nike’s strategy to emphasize the uniqueness of its product has obviously paid off; its market share soared and its revenues hit $9.6 billion in 1998. However, 1998 was also a turning point because in that year, sales began to fall. Nike’s $200 Air Jordans no longer sold like they used to, and inventory built up in stores and warehouses. Suddenly it seemed much harder to design new shoes that customers perceived to be significantly better. Nike’s stunning growth in sales was actually reducing its profitability; somehow it had lost control of its business model. Phil Knight, who had resigned his management position, was forced to resume the helm and lead the company out of its troubles. He recruited a team of talented top managers from leading consumer products companies to help him improve Nike’s business model. As a result, Nike has changed its business model in some fundamental ways. In the past, Nike shunned sports like golf, soccer, rollerblading, and so on, and it focused most of its efforts on making shoes for the track and basketball markets to build its market share in these areas. However, when its sales started to fall, it realized that using marketing to increase sales in a particular market segment can grow sales and profits only so far; it needed to start selling more types of shoes to more segments of the athletic shoe market. So Nike took its design and marketing competencies and began to craft new lines of shoes for new market segments. For example, it launched a line of soccer shoes and perfected their design over time, and by 2004, it had won the biggest share of the soccer market from its arch-rival Adidas.29 Also in 2004, it launched its Total 90 III shoes, which are aimed at the millions of casual soccer players throughout the world who want a shoe they can just “play” in. Once more, Nike’s dramatic marketing campaigns aim to make their shoes part of the soccer lifestyle, to persuade customers that traditional sneakers do not work because soccer shoes are sleeker and fit the foot more snugly.30 To take advantage of its competencies in design and marketing, Nike then decided to enter new market segments by purchasing other footwear companies offering shoes that extended or complemented its product lines. For example, it bought Converse, the maker of retro-style sneakers; Hurley International, which makes skateboards and Bauer in-line and hockey skates; and Official Starter, a licensor of athletic shoes and apparel whose brands include the low-priced Shaq brand. Allowing Converse to take advantage of Nike’s in-house competencies has resulted in dramatic increases in the sales of its sneakers, and Converse has made an important contribution to Nike’s profitability.31 Nike had also entered another market segment when it bought Cole Haan, the dress shoemaker, in the 1980s. Now it is searching for other possible acquisitions. It decided to enter the athletic apparel market to use its skills there, and by 2004, sales were over $1 billion. In making all these changes to its business model, Nike was finding ways to invest its capital in new products where it could increase its market share and profitability. Its new focus on developing new and improved products for new market segments is working. Nike’s ROIC has soared from 14% in 2000 to 24% in 2006, and it makes over $1 billion profit. Case Discussion Questions
1. What business model and strategies is Nike pursuing?
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2. How has Nike’s business model changed the nature of industry competition? 3. What new strategies have emerged in the shoe industry as a result?