Cave Behlke
Economics 101
Valbona Cela
5 April 2014
Nike, Inc., The Leader in Sportswear
Nike is an industry leading sportswear firm that operates worldwide. Started in
1964 by Phill Knight and Bill Bowerman, Nike has grown into the largest sportswear
firm in the world. By constantly coming out with different products and designs, Nike has
gained a competitive edge over most of their competitors. Having minor if any effects
from Supply and Demand in recent years, Nike has been able to maintain their position as
the top sportswear firm. Nike has been able to maximize profit by having a very cheap
production cost. By continually growing, Nike now makes up for over 47% of the market
share for sportswear firms in the United States. By expanding their market and making
new products Nike has gone from selling their shoes out of the back of a car to becoming
a multi-billion dollar business.
What is Nike?
We all know Nike for their catchy slogan, “Just do it”, and the well known
swoosh symbol, but Nike has also proved to be an extremely successful firm that is still
continuing to grow. Nike, Inc. is a multinational corporation that specializes in high
quality performance sportswear. In 2012 Nike stapled themselves as the top performance
shoe company with an industry leading 38% share of the branded footwear market and
has a market cap of $49.36 billion (“Nike”). Nike markets all of their products under its
own brand, as well as Nike pro, Nike+, Nike Golf, Nike Skateboarding, Hurley, Umbro,
and Cole Hann.
Nike headquarters started in Beaverton, Oregon on January 25, 1964, as Blue
Ribbon Sports and was created by Oregon track star Phill Knight and his coach Bill
Bowerman. The company originally operated as a distributor for Japanese shoemaker,
Onitsuka Tiger. Most of the first sales made by Knight and Bowerman, were made out of
the back of their car at track meets. In their first year of business, Blue Ribbon sports sold
1300 pairs of shoes and made a profit of around $8,000. In 1971 the partnership between
Blue Ribbon Sports and Onitsuka Tiger end and the company’s name officially became
Nike on May 30, 1971. Nike’s products are currently being sold in 170 countries and the
company still continues to grow(“Nike,Inc.”). In an industry with so much competition,
Nike must produce new products and designs constantly to keep their position at the top
of the shoe industry. Their creativity and vision keep them as the leaders of the industry
and is why they continue to grow. Nike currently employs over 38,000 people worldwide
and has over 700 retail stores(“Nike, Inc.”). Nike list that their mission is “to bring
inspiration and innovation to every athlete in the world” and “if you have a body, you are
an athlete.
The Goal of this paper is to research and examine Nike, Inc. This paper will
dissect the entire firm giving insight on how big Nike is worldwide and how they operate.
It will discuss the competitive advantages and cost of production to produce Nike’s
products. It will also cover Market Structure, Market, and how Supply and Demand has
affected Nike in recent years. The paper will discuss the substitutes and barriers of entry
in the shoe industry.
Supply and Demand
Supply and demand has actually had very little impact on Nike in recent years
because of the industry which they are in. There will always be a high demand for shoes
because they are an essential item in our lives. The supply of Nike’s shoes is always high
because they are constantly being produced in China, Indonesia, and Vietnam. The only
time Nike was really affected by supply and demand was during the recession in 2009.
Nike is a very well known brand around the world, and their products can be very
expensive. In 2009 Nike had cut down the price of their shoes because sales where falling
due to the condition that the economy was in at the time(“Nike, Inc.”). People could not
afford such a high priced shoe and Nike had such a high supply of shoes produced, so
they decided to lower the price to make the demand for the product go back up. This
brought sales back to where they once were and the price of the product were raised again
once the demand rose.
Cost of Production
Nike is able to get away with an extremely low cost of production because of
where they produce their products. Since their products are produced in China, Indonesia,
and Vietnam, the cost of labor is only $2.75 per shoe. Nike takes advantage of unfair
labor laws in these countries to get the maximum amount of work for very little pay. The
materials used by Nike are roughly $9.00 per shoe and the equipment used is only $3.00.
Shipping the shoe to America only cost around $.50. In an Indonesian plant, Nike shoes
can be made at an average of $20.00 per shoe. However, the average cost of a pair of
Nike shoes is around $90.00(“Behind the Swoosh”). Nike is more than quadrupling their
profit for each shoe they sell. Nike uses cheap labor and materials to maximize profit, and
because of their name recognition they are able to sell their products a high price.
Competitive Advantages
Nike’s abundance of competitive advantages is what has allowed them to remain
the leader of their industry for so long. One of Nike’s main competitive advantages is
their advertising. Nike has always used high profile athletes to promote their products.
One of their most famous advertisements was the “Bo Knows” campaign. Bo Jackson
was a two-sport star that was at the peak of his fame during the advertising campaign. At
the time Nike was still and up and coming company trying to make a name for
themselves. The advertisement was centered on Jackson and the concept was that Bo
could play anything in signature Nike. The commercial aired for the first time, during the
MLB All-Star game in which Bo was playing in. After the commercial had aired Bo hit a
homerun on the first pitch of the game. People fell in love with Bo Jackson, and in doing
so they all wanted Bo’s signature shoe(You don’t know Bo). Even today Nike continues
using high profile athletes in their commercials and give athletes their on signature shoes.
By doing this, Nike creates a competitive advantage because the fans of these athletes all
want their favorite player’s shoe.
Another one of Nikes competitive advantage is that they sponsor many collegiate
and pro teams. Recently Nike became the new sponsor of the NFL, so now all teams
wear and use Nike equipment. This is a huge advantage because when people watch
games on TV or live, Nike is always promoting themselves. This also shows that Nike is
a quality product. If people wearing Nike while performing on the biggest stages in
sports. This is appealing to costumers because it shows that Nike is a quality product that
can be trusted.
Nike is always coming out with new designs to keep their products fresh and
original. There are more designs and models made by Nike than any other shoe brand.
Nike has thousands of different shoe models and they make products for multiple
purposes. Each branch of Nike has their own models, so Nike is able to advertise and sell
to multiple audiences. Nike has such a broad range of products that they are able to
compete in multiple categories. Nike has different shoes for all sports and also has shoes
for running and casual wear. This allows them to broaden their costumer base and
increase profit.
Barriers of Entry
The shoe industry has many entry barriers for new companies trying to establish
themselves. If someone is trying to start a shoe brand, they have to overcome multiple
obstacles. One of the biggest obstacles is overcoming competition in the industry. If you
are trying to promote your shoe you have to overcome the completion from already
established firms. Firms that are already established can advertise or promote their shoe
to keep your product from being noticed. Advertising and name recognition from big
firms can make it hard for the new product to gain acceptance from consumers.
The biggest barrier of entry to the shoe industry is capital. In order to start your
brand you need the money and resources required. The cost of starting your own brand is
very high, so you must be willing to invest a lot of money into your firm to get it started.
Once you have a product you have to buy equipment, raw materials, a building for
production, and labor cost. Once you factor in all these different cost, getting your firm
started can be quite expensive.
Customer Loyalty is also an entry barrier when getting started in the shoe
industry. If consumers are loyal to one product they might not give your product a
chance. People might rather buy a product from a strong established firm than from an
unknown new product. Consumers want a product that they can trust and if the product is
new and unknown people might question its reliability. Customer loyalty makes it harder
to broaden the consumer base of the product and keeps you from gaining potential profit.
If it is a performance shoe research and development could be an entry barrier as
well. Sports and running shoes are made to increase performance. In order to make the
best shoe possible firms would have to pay for research to develop the best performing
shoe. This could cost a lot more money to have researchers create a product.
Patents are also an entry barrier when getting started in the shoe industry. If
another firm already patented a certain design or feature it could keep you from
producing the product you first envisioned. Getting around these patents is tough and
could keep the product from ever being produced. Not knowing there is a patent on the
design or feature can also be an issue because the firm could produce the product without
knowing and could get sued for copywriting.
Substitutes
The only real substitutes Nike faces is their competition. If another company has a
similar product that’s cheaper consumers might decide to buy the competitor’s product
rather than Nike’s. A former NBA player named Stephon Marbury created a quality
basketball shoe that was only $15. Consumers turned to Starbury’s rather than the more
expensive named brand shoes because they were cheaper but still good quality. The shoes
became extremely popular and hurt the sales of nicer brands such as Nike and Adidas.
Consumers could also favor the design or model of another firms shoe. Nike constantly
comes out with new models and designs to stay original and fulfill the desires of all types
of consumers. If not consumers could favor the competitions product more than Nikes.
Market Share
Nike is by far the leader in the market for Athletic footwear in the United States.
Nike alone makes up for over 47% of the market share in the United States with Reebok
being second at 15%(“Industry Leaders”). This shows that Nike is not only widely
known but also a widely favored product to consumer. It also shows that Nike has no
close competition in their industry. They make up for nearly half of the market and have
only become more popular in time. It is clear that Nike is the top athletic shoe brand in
the United States; However in India Nike ranks forth amongst other major sportswear
firms with only 11% of the market share(Sportswear Circuit). Even though Nike has
incredible success in the United States they fail to lead the industry in other countries. If
Nike wants to stay on top of the sportswear industry they must put forth and effort to
promote in different countries as well.
Market Structure
Nike falls under the market structure of an oligopoly. It is an Oligopoly because it
is in an industry that is primarily dominated by a small number of firms. The prices of the
products are always changing due to collusion. If one firm lowers their prices, the other
firms drop their prices too so they can compete. Since a handful of companies dominate
the market share of the athletic shoe industry, Nike and competing firms are aware of the
actions of the other firms. They are influenced by the actions of the competing firms and
base their strategic planning on how to top their competitors and be the best. Nike is a
brand that competes against numerous firms producing similar products with slightly
differentiated qualities. There aren’t any perfect substitutes to Nike besides other brands.
The sportswear industry is a spitting image of an Oligopoly.
Looking Ahead
Nike is already an extremely successful firm that has continually grown since
their start in 1964. However if they want to continue growing they must expand into
different markets. Nike is already the top athletic shoe firm in the world, but expanding
into different markets would maximize profit. Nike has expanded their brand into athletic
clothing that has become increasingly popular. Since Nike is already the leader in the
sporting wear they could also produce sporting equipment and other products to broaden
their market. Nike has the potential to continue growing, however, they must expand into
different markets.
Nike could produce sporting equipment to maximize profits. If Nike starting
producing the gear for sports they could completely take over the sports market. Nike
already has enough name recognition to attract consumers. If Nike came out with sports
gear consumers would be interested because of the reputation Nike already has in the
sports world. With an advertising campaign Nike could promote their new line of gear to
build up the hype around the new product. By adding a new product Nike could expand
their market as well as becoming the biggest name in sports.
To broaden their consumer base Nike could come out with a casual clothing line.
Nike is already famous for their stylish athletic wear. If they could transition that into a
nice casual clothing line they could gain a whole new customer base. By adding a casual
line, Nike could appeal to a whole new audience. These new products will help Nike
continue to grow and make a name for themselves in something other than athletics.
To make the brand more well known Nike could sponsor high schools the way
they do colleges and pro teams. By sponsoring high schools, Nike is advertising their
product even more. If the kids wear Nike products they will get used to wearing Nike
equipment and clothes. If they like the products it could get them to buy the products
after using them. This could also play a similar role to how the high profile athletes
advertise the product. Younger kids look up to older kids in high school while growing
up. If the kids see their favorite player from the high school wearing all Nike apparel,
then they might want to get the products so they can have the same gear as them. Kids in
middle school that play sports could see that their high school only wears Nike, the kids
would want to get the products to get used to them and have the same stuff as the high
school.
Nike could expand their products into extreme sports. The only sports that Nike
does not make clothing or gear for are extreme sports such as dirt biking, snowboarding,
BMX, mountain biking, and skiing. By expanding their market into extreme sports Nike
could increase revenue drastically. There is a whole branch of sports that Nike is missing
out on. Nike could use a similar ad campaign as Red Bull to promote an extreme sports
line by creating extreme sports movies to advertise the clothing and equipment. With the
name recognition Nike has they could come out with a product and it would be trusted
right away. Adding a new extreme sports line would expand the firm and remarkably
increase revenue.
To increase popularity and sales worldwide, Nike needs to promote more in other
countries. When looking at the market share of the sportswear industry, it was clear that
Nike was by far the most popular sportswear firm in the United States. However when
looking at the market share charts in different countries, Nike was not the most popular
sportswear. In order to fix this Nike must promote in other countries, so their name
recognition and popularity is the same as it is in the United States. By doing so overall
revenue and popularity would have a huge increase. If Nike is able to expand their
popularity and dominance worldwide they could take over the industry. They are already
the leaders of the sportswear industry by a substantial margin. Expanding into other
countries would only solidify Nike’s dominance in the future.
To expand into different markets Nike could create a new sports drink. The only
other well-known sports drinks on the market are Gatorade and Poweraid. If Nike was to
create a good sports drink they could instantly compete with Gatorade and Poweraid.
Nike is already one of the biggest names in sports, so if they created a sports drink it
would instantly be appealing to consumers. With there being very little completion in the
market for sports drinks, Nike would be able to compete immediately. This would also
expand the firm into different markets, which would increase name recognition as well as
revenue.
Nike has the potential to continue growing, however, they must expand into
different markets. Expanding their firm into other markets is the best thing Nike could do
for their future. By expanding into other markets, they would be able to increase revenue,
name recognition, and growth. Nike could compete early with new products just because
of the brand name. If these could become successful Nike could jump easily jump into
other markets because their products would be trusted and they would have consumer
loyalty. By promoting themselves and expanding their firm they could open up new
possibilities to grow even more. Nike is an incredibly successful firm that can continue
their success in the future by expanding into other markets and promoting themselves.
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