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1. MGMT65000 – Strategic Management – spring 2011
Test 1
By: Divya Mishra
School of Management
Purdue University Calumet
Submitted to: Dr. Arifin Angriawan
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2. Company profile & background
NIKE, Inc. is engaged in the design, development and worldwide marketing of footwear,
apparel, equipment and accessory products. . It sells its products to around 18,000 retail accounts
in the United States and through a mix of independent distributors, licensees and subsidiaries in
nearly 200 countries. NIKE is the largest seller of athletic footwear and athletic apparel in the world.
The Company creates designs for men, women and children. The top selling product category
includes running, basketball, children's, cross-training and women's shoes. It also designs shoes
for outdoor activities like tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling,
cheerleading, aquatic activities, hiking and other athletic and recreational uses.
Index membership Sector Industry Employees
S&P 500 Consumer Cyclical Footwear 23,300
Products
NIKE sells sports attire and accessories relevant to each sport mentioned above as well as other
sports-inspired lifestyle apparel, like bags, socks, sport balls, eyewear, protective equipment,
basic sport equipment, etc.
In addition to NIKE’s footwear, apparel, and accessories businesses, the Company sells products
under other brand names in particular markets. NIKE wholly-owns five footwear and apparel
companies that specialize in different sports: Cole Haan, Converse Inc., Hurley International
LLC, Umbro Ltd., and NIKE Golf. These subsidiaries combined together account for 13% of
total revenues, $2.5 billion, in fiscal 2009.
Manufacturing Footwear & Apparel
All of NIKE’s footwear is manufactured outside the United States in the factories of China,
Vietnam, Indonesia, and Thailand and account for 98 percent of total NIKE brand footwear in
2009. The main raw materials used in NIKE footwear are rubber, plastic compounds, and foam
cushioning materials, nylon, leather, canvas, and polyurethane films used for cushioning
components.
NIKE brand apparel is also manufactured almost entirely outside of the United States, in 34
different countries. The main materials used in NIKE apparel are natural and synthetic fabrics
and threads, plastic and metal hardware, and water and heat resistant fabrics.
Marketing and Advertising
NIKE places a significant weight on marketing the company and its products. NIKE aggressively
bonds the contracts with highly successful and influential athletes, coaches, teams, and leagues
like Michael Jordan, Serena Williams, and Tiger Woods to popularize its footwear, apparel and
sports accessories.
In order to sustain its dominance in the industry and stay competitive stay, NIKE actively
responds to trends and changes in consumer preferences by adjusting the mix of existing product
offerings, developing new products, styles and categories, and influencing sports and fitness
preferences through aggressive marketing. Its primary areas of marketing remain Net TV and
magazines.
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3. Competitors
The rivalry in the sports wear industry is very high. NIKE competes with numerous athletic and
leisure shoe companies worldwide. It faces fierce competition in product offerings, technologies,
marketing expenditures, pricing, costs of production, and customer services. The main
competitors are Adidas, Reebok, Timberland, Woodland, and Puma.
SWOT Analysis for NIKE
Strengths Weaknesses
Brand recognition Overseas manufacturing
High product quality dependency
Effective marketing Decreasing United States
strategy market share
Capacity of innovation High product price
Strong distribution chain compared to Adidas
Strong R&D Currency exposure
Strong customer Medium retail presence
relationship/satisfaction
SWOT Analysis
Opportunities Threats
Expansion into emerging Fierce industry competition
markets Revenue relies on
Increased demand in product consumers’ discretionary
innovation income
Growing segment of women Economic rescission
athletes Fluctuation in the currency
Increase in the number of
sports events like Olympic,
FIFA
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4. NIKE Innovations
NIKE with Apple: The NIKE+ package consists of a pair of specially designed NIKE+
running shoes, an iPod nano, and a NIKE + iPod sport kit. The kit consists of a sensor
that fits into a built-in pocket beneath the insole of the left shoe and a receiver that fits
into the iPod nano dock connector. As a person runs, iPod tells the distance, pace, and
calories burned via voice feedback that adjusts music volume as it plays.
(Google image)
Design your own shoes: NIKE allows customers to design their own shoes from a
catalogue of predefined designs. Customers can choose their own colors and mascots to
create shoes which define their personality. It provides Touch screen technology in store
allowing customers to design shoes of choice.
(Google image)
Nike self lacing automatic shoes: NIKE is also coming up with the new automatic self
lacing sneakers. The automatic lacing system provides a set of straps that can be
automatically opened and closed to switch between a loosened and tightened position.
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5. Critical data of Nike Annual Report
$ Millions 2010
Net Income 1,906.7
Current Liability 3,364.2
Total Assets 14419.3
Tax Rate 24.2%
Interest Rate 6.35%
Long-Term Debt 445.8
Return on Equity 19.54%
Total Equity 9753.7
Weighted Average Cost of Capital 8.9%
Capital Employed 11055.1
Interest Expense 6.3
EBIT 2516.9
NOPAT 1907.81
Return On Capital Employed 20.7%
Economic Value Added 1267.25
Cash Flow From Operations* 3164.2
Capital expenditure* 335.1
Free Cash Flow 2045.31
Five year Nike stock performance vs. S&P500* (Fiscal year 2006-2010)
2%
Nike
S&P500
90%
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6. 2010
Nike revenue growth 2006-2010
Nike Revenue
25000
20000
Revenue
15000
10000
5000
0
2006 2007 2008 2009 2010
Year
Nike revenue generation by product 2010
Revenue Generation by Product
6%
34%
Footwear
60% Apparel
Equipment
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7. 1. Please use Figure 2.3 page 53 (Grant’s textbook, 7th edition) as your overall guide to
draw a balanced scorecard for the firm. Please draw a balanced scorecard for the firm
that you choose. Identify all four perspectives, each perspective’s objectives and their
relationships. See example in the appendix. Feel free to modify it. On the other pages
please elaborate on the four perspectives and their elements. For the financial
performance perspective, at least you need to discuss: ROCE, EVA, and FCF. Conclude
what the numbers mean to you as a manager (e.g. Good, bad, or neutral; and why).
Why do firms need to prepare a balanced scorecard? (20 points)
Balance Scorecard for NIKE 2010
FINANCIAL GOOD--NEUTRAL
• ROCE : 17.8% Neutral
• EVA: 1267.25 millions Good
• FCF : 2045.31 millions Good
• ROE : 19.54% Good
• Profit Margin :10.03% Good
• NIKE growth: 7% vs. industry growth Good
4.5%
Bad
• High advertising cost
Good
• Better COGS% than competitors
CUSTOMER GOOD-NEUTRAL
• Customer Satisfaction Good
• Customer Loyalty Good
• Customer retention ratio Good
• Market Share Good
• Competitive Price Bad
• Number of Customers Good
Good
• Design own shoes option
INTERNAL GOOD
• Marketing
Innovative Products Good
Celebrity endorsement Good
Diversity of online product Good
• R&D
Integrated researches Good
Product technology Good
High quality product design Good
• Good supplier relation Good
• IT for inventory control Good
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8. LEARNING-GROWTH GOOD-NEUTRAL
• Decreased revenue growth by 0.84% in Bad-neutral
2010
• Less capital investments and enhanced Good
customer satisfaction
• Technological improvement in products Good
testing
• Strategy for managed high service within
the industry Good
• Productivity gain Good
• Increased product innovation Good
• Moving & growing in fitness and training
clubs Good
Financials: The financials of Nike indicate healthy performance in the present scenario,
except for few concerns. The ROCE is impressive. It has improved from 17.8% in 2009
to 20.7% in 2010. But has decreased since 2006. The financial crises of 2009 can be the
reason of fall in ROCE. The FCF is $2045.31 million. The FCF shows healthy growth.
The EVA, profit margin and ROE have improved from 2009 values. This reflects a
healthy growth of the company in the industry. The only concern is the high advertising
and promotion expenses due to celebrity endorsement. Nike’s heavy investments in
advertising and promotions leave less cash on the table for other operations, resulting in
less cash turnover ratio. Thus the balance scorecard from the financial standpoint looks
neutral-good.
Customer: NIKE focus has always been on the customer satisfaction. It invests a lot in
its product research and development in order to offer better sports apparels to the
customers. It has always striven to provide a competitive edge to foster the best possible
performance in its athletes. The researchers work on the three primary area:
Biomechanics (study of human movement), Physiology (study of the integration of the
body’s energy systems and responses to the environmental stresses), and
Sensory/Perception (subjective evaluation of product attributes, usability and durability).
Its innovation in products includes “NIKE with Apple”. It aloes provides touch screen
facility in its stores, allowing customers to design shoes of choice. Due to great product
quality, product innovation, the customer satisfaction and customer retention for NIKE is
very high. The only criterion where the company faces tough time is its high competitive
prices. The competitors like Adidas, Timberland offer products at lower price compared
to NIKE. Thus the balance scorecard shows that NIKE is good-neutral in the customer
satisfaction.
Internals: NIKE’s efficient internal operations are reflected through its better financial
ratios. The key success factors associated with NIKE’s success are its distinctive
marketing capability, volume manufacturing capacity, extensive research and
development effort to design premium concert athletic products for customers, product
differentiation and innovation and distribution capabilities. Marketing capability through
celebrity endorsement has always been the core competency of NIKE. Its efficient
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9. distribution capacity and use of IT to control inventory can be seen in better inventory
turnover ratio. Thus the balance scorecard shows that NIKE is doing good in internal
operations
Learning & Growth: NIKE has shown a consistent growth every year. The forecast for
2011-2014 also reflect that it will continue to grow approx 7% every year. The sales and
revenue of the company has increased. Though the sportswear industry is at the maturity
stage of the product life cycle. The market is basically experiencing a slowdown in sales
growth because the products have achieved acceptance by their most potential buyers.
Through a number of strategic plans, NIKE has been able to cut cost and maintain the
product quality. Its technological improvement and growth in products like “NIKE with
Apple” and “design your own shoes” has enhanced the customer satisfaction. But the
year 2010 has shown some drops in the financial ratios and increase in the cost structure.
NIKE has the core competencies, resources and the capability to change odds into evens.
With the help of its core competencies and strategic it will continue to grow and offer
improved and high products to the consumers. The balance score card shows good in
terms of learning and growth.
Thus NIKE appears to be medium –high attractive.
A balanced score card helps to maximize the long term goals. The company is able to evaluate
their corporate path with the balanced score card. The four key questions that can be answered
by the balanced scorecard are:
1. How do we look at shareholder?
2. How do customers see us?
3. What must we excel at?
4. Can we continue to improve and create value?
(Grant, 2010)
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10. 2. Draw a table to show some potential threats and opportunities of the six sectors of the
general environment. The six sectors are seen in Figure 3.1. Page 65. Apply Figure 3.3
page 70 and Figure 4.1 page 98 to summarize the industry five forces and their
elements. On other pages, please elaborate on the forces and their elements. Which of
the Porter’s five forces has had the biggest impact? Apply Figure 3.6. Page. 88, Table
3.3. Page 89 or Figure 3.7. Page 90 to identify the key success factors of the industry.
Why do firms need to perform five forces analysis? Please elaborate on one threat that
you think is the most important. Please elaborate on one opportunity that you think is
the most important. You can conjecture about the timing and impact of the threats or
opportunities. Please describe how that threat and opportunity impact the firm through
its industry five forces. (20 points)
The threats and opportunities are the external factors which affect the performance of a
company. Threat and opportunity are external to an organization. NIKE is facing some
threats that could have a significant impact on its financial performance and growth. At the
same time there are also promising opportunities that provide a strong growth prospect for
NIKE.
The Six Sectors of General Environment
National The Natural
&Internation Environment
al Economy
The Industry
Environment
Technology Suppliers Demographic
Competitors Structure
Customers
Government The Social
& Politics Structure
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11. INDUSTRY ENVIRONMENT THREATS OPPORTUNITIES
ANALYSIS
Global Economy Economic recession/ International expansion,
Consumer purchases slowing building upon its strong
down/ Falling international global brand recognition;
economy; fluctuation in strong economic conditions in
foreign currency & exchange other countries
rates
Technology Use of IT in marketing
information system; Scientific
research in products quality &
innovation like Motion
Analysis (kinematics), Foot-
pressure Measurement, Ankle
Range of Motion etc
Government/Politics Increased legislation/Higher Macroeconomic stability, low
price of products, Customer interest rates, stable currency
right conditions and the
international competitiveness
of the tax system
Natural Environment Natural disasters like Cold/Rainy climatic condition
earthquake in Japan resulted creates a demand for shoes.
in loss of lives, resulting in
customer loss
Demographic Baby boomers pushed into Young generation inclination
late forties are less inclined in sports & fitness; large
for sporty activities like population more customers;
running; lower income of high income customer buying
customers; ethnic mix of at premium price
some countries
Socio-Cultural Inclination towards fitness
leading to demand for fitness
products particularly exercise
apparel, shoes and
equipments
Biggest opportunity for NIKE
Product development offers NIKE a great opportunity. NIKE, being a sports brand, attracts
the sports as well as non-sports population. The brand is intensely defended by its owners
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12. who truly believe that NIKE is not a fashion brand. But the consumers that wear NIKE
product do not always buy it to participate in a sport event. For the younger generation i.e.
youth especially, NIKE is a fashion brand. This creates its own opportunities since product
could become unfashionable before it wears out i.e. consumers need to replace shoes.
Since NIKE is seen as a fashion brand by the youth culture, it can also develop products such
as sport wear, sunglasses and jewellery. The youths spent a large amount of money in these
accessories. Therefore such high value items can be a great opportunity for high profits.
Biggest threat for NIKE
The greatest threat for NIKE is the inevitable stiff competition from other sports brand,
especially Adidas. NIKE operates in the sports shoe and garment industry which is one of the
most competitive marketplaces. For a company to succeed in competition there is a
continuous need to develop new products with higher quality than its competitors. The
dynamic needs and demands of consumers serve as a challenge to the management.
Competitors like Adidas and Puma are developing alternative brands to take away NIKE's
market share. They compete with Nike in product design, quality, technology, advertising
and competitive price.
Significance of Five force analysis
Porter’s five forces of competition framework view the profitability of an industry as
determined by the five forces of competitive pressure. It is a simple but powerful tool for
understanding where power lies in a business situation. It helps a firm in understanding its
current strength in the industry. It also brings into light the strengths of the competitors. With
a clear understanding of where power lies, a firm can take reasonable advantage of a situation
of strength, improve a situation of weakness, grab the opportunities and keep away from
taking wrong steps. This makes it an important part of planning a strategy for any firm in any
industry. At the same time, the tool helps in identifying whether new products, services have
any future prospect and the potential to be profitable.
Five forces analysis for NIKE
Threat of entry
(Low-moderate)
Buyer Power Rivalry Supplier Power
(High) (HIGH) (Low)
Threat of
Substitute
(LOW)
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13. Rivalry
The rivalry among existing competitors in the footwear industry is very high. Large firms such as
NIKE, Reebok and Adidas have grown immensely and established their foot firmly in the
industry. These firms are also globally recognized and have a huge loyal customer population.
The firms also engage in online selling, allowing them to increase sales while minimizing
operating costs. The giant firms of the industry invest heavily in building a strong brand identity.
The competition is fierce and thus the rivalry is very high.
Threat of Substitute
The substitution for the athletic footwear is low, as there are little alternatives available to choose
from. The other substitutes available in the footwear industry are boots, flip-flops, and sandals.
But these cannot be used in place of sports shoes, in any sporty event. For instance, a soccer
player would not wear boots or flip flops to play soccer. Therefore, there are no real substitutes
for athletic footwear. And similarly there are lesser substitutes available for athletic garments.
Threat of New Entrants
NIKE has always striven to provide a competitive edge to foster the best possible performance in
their athletes. This is the reason NIKE continues to lead innovation in footwear, apparel, and
equipment. NIKE is a globally recognized brand and has a huge population of loyal customers.
For the younger generation i.e. youth especially, NIKE is a fashion brand. Even being a sports
brand, it attracts the sports as well as non-sports population. One of the major reasons NIKE is so
successful in popularizing its footwear, apparel and sports accessories is because it hires sports
celebrities as their spokespeople, including legendary basketball player Michael Jordan, Serena
Williams, Tiger Woods. Thus threat of new entrants is low for NIKE.
Bargaining Power of Suppliers
The raw material required to produce sport footwear are leather, rubber, and cotton. These are
available in the market in abundance. At the same time there are many suppliers of such raw
materials in the industry. NIKE definitely has an advantage over their suppliers. Thus the
suppliers are dependent on the firms like NIKE and Adidas as their means of their earnings. Thus
the supplier power of the suppliers is low.
Bargaining Power of Buyers
The power of buyers in the footwear industry is distributed among several companies. There are
a large number of buyers relative to the number of firms in this industry. For a company to
succeed in competition there is a continuous need to develop new products with higher quality
than its competitors. The price of NIKE products is comparatively high as compared to the other
brands. Customers are price sensitive. There are other options in sports footwear available in the
industry at a lower price. Thus the bargaining power of buyers is high.
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14. Porter’s force which has the biggest impact
The Porter’s force that has the biggest impact on NIKEs is the rivalry. It faces fierce competition
in product quality/technology, competitive price, marketing capability/celebrity endorsement,
distribution and manufacturing. The sportswear industry is highly competitive and rapidly
changing. At the same time, industry is at the maturity stage of the product life cycle. The market
is basically experiencing a slowdown in sales growth because the products have achieved
acceptance by their most potential buyers. In such conditions, it is very difficult for any company
to sustain its competitive advantage. For a company to succeed in competition there is a
continuous need to develop new products with higher quality than its competitors. The ever
changing needs and demands of consumers serve as a challenge to the firm. Therefore NIKE
invests heavily on R&D, to offer innovative products and services, in order to stay consumer’s
first choice.
Key Success Factors
Key success factors are most significant to future success of a firm in industry. The KSFs for
NIKE are its distinctive marketing activities, extensive research and development effort to design
premium concert athletic products for customers, product differentiation and extensive
manufacturing, innovating and distribution capabilities. Superior performance in some or all of
the factors creates a lot of value for the customers.
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15. 3. Identify and describe the firm business strategy (Porter’s generic strategies: Figure 8.5.
page 224) and business model (Read Johnson, Christensen, and Kagermann, 2008,
Reinventing Your Business Model, Harvard Business Review). You can also further
discuss how the strategy or business model supports the firm’s FCF value drivers. Read
file FCF drivers.doc (20)
Business Strategy of NIKE
A firm can achieve a higher rate of potential profit over its rivals in one of two ways: either it
can provide identical product or service at a lower cost, or it can supply a product or service
that is differentiated in such a way that the customer is willing to pay a price premium that
exceeds the additional cost of the differentiation (Grant, 2010).
The generic business strategy for NIKE is a product differentiation strategy. NIKE
emphasizes on the key strategy elements of branding advertising, design of products,
exclusive customer service, high quality products and new product development (Grant,
2010).
Cost Advantage
(Similar products at
lower cost)
Competitive
Advantage
Differentiation
Advantage
(Price premium and
unique product)
NIKE is the leader of industry in product differentiation. Product differentiation helps company
to boosts its profit through the sale of different product. The other advantage of producing a
number of product lines is the reduction of risk in that if one product fails there are numerous
other products to compensate for this loss (Equity research, 2003).
NIKE designs most of its footwear for athletic purpose. In order to diversify its products, a large
percentage of their products come from sales of footwear, apparel, and accessories for casual and
leisure purposes.
NIKE differentiates its products in a variety of ways. Firstly, it manufactures sports goods for
three different segments of people: men, women and children. Each of these three segments is
carefully analyzed on the basis of needs, physiology, design preference and trend of choices.
Secondly NIKE also differentiates it products by offering a variety of footwear accessories and
apparels like NIKE watches, gym bags, sport balls, timepieces, eyewear/glasses, bats, gloves and
skates. It also provides every type of sports equipments like basketball, tennis, soccer, football,
golf, aquatic activities and others (Equity research, 2003).
NIKE also has the licensees to manufacture and sell NIKE brand products aside from athletic
footwear and accessories. The product differentiation is achieved by the company through the
sale of products like children’s clothing, school supplies, electronic media devices, timepieces
and other items under NIKE brand name. This requires a consistent strategic management
planning.
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16. NIKE subsidiaries, like Bauer NIKE Hockey Inc., are another way by which the company
differentiates its product line.
In addition to NIKE’s footwear, apparel, and accessories businesses, the Company sells products
under other brand names in particular markets. NIKE wholly-owns five footwear and apparel
companies that specialize in different sports: Cole Haan, Converse Inc., Hurley International
LLC, Umbro Ltd., and NIKE Golf. These subsidiaries combined together account for 13% of
total revenues, $2.5 billion, in fiscal 2009 (Lancellotti, Ruiz, 2010).
Thus with the help of resources and capabilities like strategic innovations in marketing abilities,
product engineering, product innovation and creativity and research capabilities; NIKE provides
high quality sports products to the consumers.
NIKE product
differentiation
Strategy
Licensees to produce & Men, Women & children NIKE’s wholly-owned Accessories/Apparels
sell NIKE brand products on the basis of needs, five footwear & like gym bags, eyepieces
aside from athletic physiology, design apparel companies & Sports equipments for
footwear & accessories preference &choices trend specializing in sports almost all sports
School Cole Haan
supplies
Converse Inc
Children’s
clothing
Hurley
Electronic International LLC
media
device Umbro Ltd
NIKE Golf
Business Model
The business model consists of four interlocking elements that are taken together to create and
deliver values to the customers as well as the company. The four elements are:
i) Customer value proposition iii) Key resources
ii) Profit formula iv) Key processes
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17. Customer Value Proposition (CVP)
Target customers Jobs to be done Offerings
Athletes Provide the most efficient Ground-breaking apparel &
Health/Fitness products to foster the best footwear with cutting edge
segment possible performance in technology , distinctive
Women segment athletes; remove access ,skill & marketing to appeal more
time barriers customers
Profit formula
Revenue: The revenues are
projected to increase by 5-6%
every year till 2014; NIKE has a
large market share to generate
revenue. Innovative products
bring profit for company.
Cost structure: Invests heavily
in R&D & marketing; lower
manufacturing, labor & material
cost due to outsourcing; low
Key resources of NIKE distribution cost due to
Efficient distribution capability
employees Resource velocity: Good asset
Strategic productivity ratios indicate NIKE
effectiveness in deploying its
marketing
assets. Higher the ratios, better is
innovations the performance of the company.
Distribution
network
Integrated
research
laboratories
Reputation in
industry
Key processes
Processes: Highly innovative
product design, volume
manufacturing, outsourcing for
manufacturing, distinctive
marketing strategy, effective IT,
distinctive R&D, periodic
training of employees, tight
financial controls
(Johnson, Christensen, and Kagermann, 2008)
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18. NIKE removes the access barrier by proving products in store as well as online. It removes the
time barrier by delivering the products faster due to its excellent distribution capabilities. It also
reduces the skill barrier by offering a high product quality, technologically advanced application
like “NIKE with Apple” or “design your own shoes”. Its products are high priced; so it does not
remove the wealth barrier. But more factory outlets stores indicate its efforts to lessen the wealth
barrier.
The value drivers for a firm are sales growth, operating profit margin, cash tax rate, net working
capital/sales, fixed assets/sales, other long term assets/sales, and cost of capital. NIKE has high
sales growth compared to others in the sports apparel industry. This is due to its large market
share. Its operating profit margin is also more than 5, which reflects profitability and effective
performance. Its asset productivity ratios like fixed asset turnovers are also very impressive. The
tax rate is 35%, which is favorable for NIKE, but can be improved. If NIKE also focuses on the
price sensitive segment of consumers by offering its products at a cheaper price at places like the
factory outlets, it can attract a large segment of consumers. This can increase its market share,
resulting in increased profit margin.
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19. 4. To what extent is the firm’s performance attributable to the industry attractiveness and
to what extent to the firm’s competitive advantage? Use Figure 2.1. Page 47 (see also
Capsule 2.3.) to assess the firm’s competitive advantages/ disadvantages. Draw the
firm’s ROCE tree (disaggregation/ DuPont formula). Competitive advantages are
better ratios of ROCE breakdown. (20 points)
The ROCE tree diagram is according to the data of 2009
COGS/Sales
NIKE: 55.13
ADS: 54.16
Net Margin Deprec/Sales
NIKE: 7.75 NIKE: 1.81
ADS: 2.36 ADS: 2.88
SG&A/Sales
NIKE: 30.26
ADS: 42.20
ROCE
NIKE: 17.8
ADS: 11.31 Fixed Asset
Turnover
NIKE: 7.32
ADS: 2.8
Inventory
Turnover
NIKE: 8.13
Asset ADS: 7.05
Productivity
NIKE: 1.44
ADS: 1.16
A/R Turnover
NIKE: 6.90
ADS: 6.07
Cash Turnover
NIKE: 8.21
ADS: 13.39
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20. The firm’s attributable to the industry attractiveness and its competitive advantage can be
explained through the ROCE diagram.
ROCE is an indicator of the effectiveness of the firm in generating profits from its asset. It
reflects the efficiency and profitability of a company's capital investments. The ROCE for NIKE
is 16.10 which are higher compared to ROCE of Adidas (11.30). This shows that NIKE is
generating more profits over its assets and liabilities.
Net Margin is a ratio of profitability and indicates how much out of every dollar of sales a
company actually keeps in earnings. It is very useful tool in comparing two companies in the
same industry. Net margin greater than five reflects profitability. A higher net margin of NIKE
reflects that it is more profitable and has a better control over the costs compared to Adidas.
Adidas on the other hand has the net margin less than 5, which reflects that the company is not
generating attractive earnings.
NIKE has better control over costs compared to Adidas; which is reflected in its lower SG&A.
The COGS% for both NIKE and Adidas is comparable. It means that both the firms are doing
well in maintain the cost of goods sold.
Asset productivity ratios like inventory turnover, cash turnover, fixed asset turnover,
receivables turnover indicate how effectively a company deploy its assets. The ratios describe the
sales dollars generated per unit of resources. Higher the ratios, better is the performance of the
company.
The asset turnover ratio is the amount of sales generated for every dollar’s worth of assets. The
inventory turnover is a ratio showing how many times the inventory is replaced. NIKE is
deploying its assets better than Adidas to generate sales dollars. A/R turnover ratio is a measure
that describes quantifies a firm's effectiveness in extending credit as well as collecting debts. The
numbers show that both NIKE and Adidas are doing well, with NIKE having an upper hand over
Adidas. The cash turnover reveals whether a company can finance their current operations. The
numbers show that Adidas is more efficient in financing its current operations than NIKE. The
higher inventory turnover ratio for NIKE indicates that it has a good control over its inventory
management. The inventory management of Adidas is also good but it is less than NIKE. This
means that NIKE is doing better than Adidas in inventory control.
But at the same time NIKE also has some competitive disadvantages like poor cash turnover
ratio. NIKE should also try to improve its A/R turnover ratio.
Overall, the study of financial ratios indicates that NIKE is performing better than Adidas.
The ROCE tree diagram shows that the position and performance of NIKE in the industry is
highly attractive.
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21. 5. a) Use and adapt Figure 5.4 page 133 or similar diagram to describe the firm’s value
chain. In which of the firm’s functions (e.g. purchasing, distribution, marketing, IT,
HR, etc.) do/es the firm’s competitive advantage/s lie (i.e. what functions that contribute
to the better ratios in question 3 or what is the core competences of the firm)? In which
what
of the firm’s functions do/es the firm’s competitive disadvantage/s lie (i.e. what
functions that contribute to the worse ratios in question 3)? (10 points)
Value Chain Analysis-Value chain analysis is a systematic way of examining all the
Value ystematic
organizations functional activities and how well they create customer value
value.
Value chain diagram
Primary Activities Support Activities
Inbound Logistics Firm Infrastructure
Low production cost Empowerment of top management
Outsource non-core activities
core Great financial discipline with low
Inventory control and reduced debt
inventory risks due to efficient Strong brand, product, marketplace
supply chain tools solution, delivery and support
Focus on product design, Effective compliance process
marketing and product through strategic knowledge and
technology verification
NIKE IHM specialized in Calculated risk factors
rubber, foam and raw material
Human Resource Management
Operations Core values of honesty,
Heavy investment in R&D competitiveness and team work
Low and no packing options Minimum hierarchy concept
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22. NIKE personals to assist factory Great management and efficient
management corporate strategy globally
Efficient network structure of Blend of new hires and promotion
operations management High ethical values among
No heavy metal, glue or solvent employees
used Well monitored labor audit add
Outbound logistics brand audits
Strong control over own
distribution channel Technology Development
Good supplier relation, Great product technology like
Ability of forward integration Motion Analysis, metabolic rate,
Use of strong Servers to support blood work.
and manage supply chain projects Air-sole technology expert
Touch screen technology in store
Marketing & sales allowing customers to design shoes
Brand recognition and reputation of choice
Celebrity endorsement Huge sales through e-commerce
Higher allocation on marketing
budget Procurement
Strong customer base Just in time strategy as finished
Diversity/Variety of products goods are shipped as soon as they
offered online are ready for sale
Buffer and safety stock in hand
Services
Use of IT to improve customer
service
Great product quality resulting in
increased customer satisfaction
Touch screen technology in store
allowing customers to design shoes
of choice
NIKE has always provided the most efficient products to foster the best possible performance in
their athletes. This is the reason NIKE continues to lead in innovation and technology in
footwear, apparel, and equipment.
The first better ratio is COGS/sales. It is a function of the competitive advantage of cost
efficiency. NIKE has a good control on production cost. The second better ratio is SG&A which
means that NIKE has lower selling and administrative cost over Adidas. Thus it has a
competitive advantage of effective in store operations. NIKE has a better asset turnover ratio
compared to Adidas. This means that NIKE generates more sales for every dollar’s worth of
assets. The asset turnover ratio is a result of the competitive advantage efficient operations. The
better inventory turnover reflects the competitive advantage of efficient inventory management.
The firm’s competitive advantage is brand recognition, effective inventory management,
efficient in-store operations, and cost efficiency. The competitive advantages of NIKE lie in
firm’s R&D, Operations, Information technology and Marketing functions. NIKE is deploying
its core competencies/ capabilities/resources better than Adidas to generate profitability.
.
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23. b) Then propose hypotheses on HOW the principal functions or their interactions
create the firm competitive advantages and disadvantages. The followings can help:
Figure 2.2 Page 51; Figure 3.7. Page 90; Table 5.3. Page 132; Figure 5.4 pages 133. You
can utilize sources of cost and differentiation advantage discussed in chapter 7, 8, and 9.
You can also draw a map that relates (use arrows) principal capabilities to competitive
advantages. See Textbook Table 5.3 for examples of organizational capabilities. This is
very important exercise because basically strategy is about the exploitation of core
competence. (10 points)
Competitive
Brand Cost Inventory Innovation & Effective
Advantage
recognition Efficiency management Product operations
and (Better cogs (High Inventory Quality (SG&A %)
reputation %) turnover) (High profit
margin)
Capabilities
Product Distribution Relationship Financial Asset
design capability Management Control management
capability & strategic
outsourcing
Resources
Reputation Efficient Integrated Distribution & Strategic
Employees Research Subcontractor innovation
laboratories Network
Manufacturing
Distribution &
Marketing &
Information
Technology
Operations
Customer
corporate
functions
Resource
Service
Human
R&D
sales
23 | P a g e

24. The above diagram shows the interaction between the NIKE’s functional units, its resources and
capabilities and competitive advantages. Some of the competitive advantages are explained as
follows:
i) High product quality: The R&D of NIKE results in the competitive advantage of innovation
and high product quality. The firm has product design capability, which is due to its highly
efficient integrated research laboratories. NIKE invests heavily in having researchers perform a
number of scientific techniques to quantify their findings (Equity research, 2003). Among
numerous tests performed, here is a list of some exams NIKE’s athletic shoes are tested for:
Motion Analysis (kinematics)
Foot-pressure Measurement
Ankle Range of Motion
Metabolic Cart
Heart-rate monitors
Blood-work
NIKE heavy investment into the functional area of R&D and Information Technology results in
the competitive advantage of high and innovative product quality (Equity research, 2003).
ii) Inventory turnover ratio: The other example is the competitive advantage of high inventory
turnover which is due to the deployment of IT and efficient distribution/subcontractor network of
NIKE. High inventory turnover is due to the distribution capability of NIKE. The distribution
capability of the company is so efficient because of the core competency of
distribution/subcontractor network. Finally, the efficient distribution/subcontractor network is
connected to the presence of the functional areas of distribution & sale and information
technology. NIKE invests in IT to keep a track of the inventory control.
iii) Better SG&A ratio: NIKE has good SG&A ratio. But on the contrary NIKE spends lot in
marketing and advertising. Thus Nike has a high direct cost. But to compensate the high direct
cost, it outsources the product manufacturing. NIKE does not have any factory in the home
country (USA) where the operating costs are high. All the company products are manufactured
in countries like Thailand, Vietnam, and Indonesia where the labor cost, material cost, and other
overhead costs are very less. The company saves a lot of money in employee salary,
material/labor/overhead costs and other indirect cost. This results in a lower SG&A cost.
c) Also write what other competitive advantages the firm could possess given the observed
resources and capabilities. Also write the sources of the competitive disadvantages.
Basically identify what those competitive advantages that the firm should have given the
resources and capabilities. (10 points)
Competitive Disadvantage and sources:
Poor cash turnover: NIKE has a lower cash turnover compared to Adidas. The cash turnover
reveals whether a company can finance their current operations. NIKE pays most of its earnings
in dividends and also invests a lot in its R&D and advertising. One of the reasons for a lower
cash turnover ratio for NIKE can be its heavy investments in advertising and promotion. NIKE
places a significant emphasis on marketing the company and its products. NIKE hires sports
celebrities as their spokespeople, including legendary basketball player Michael Jordan, Serena
Williams, Tiger Woods, which require lots of cash investment. NIKE has a huge cash dividend
payout, which is increasing gradually every year. Thus it has lesser cash available to finance its
other operations.
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25. Weaker retail presence: NIKE is the globally recognized brand. It has a strong online presence.
But it has small retail presence. Thus the accessibility of the products can be increased to a great
extent if NIKE offers more store/retail presence. This would remove the accesses barrier and it
will add to the customer value proposition.
The competitive advantages that NIKE should have given the resources and capability are
shown in the table below:
Competitive Advantage/ Core competence/ Explanation
disadvantages problem/ Value chain
activities
Better Cash turnover Financial control and Decrease spending on
strategic innovation endorsement and celebrity,
increase cash balance by
long term loans, less
dividends payments
Better receivable turnover ration Financial control and Collect outstanding accounts
operations receivable and ensure the
timely collection of imparted
credit that is not earning
interest for the firm.
Cost Leadership/Better Financial controls & The biggest challenge which
competitive price asset management the firm faces. Its prices are
fairly high compared to the
others; focus on youth and
non-athletes and offer a line
extension for footwear &
apparels that are not
premium priced and are
affordable to these segments
Effective retail presence/ Asset management & NIKE has a weaker retail
effective store presence effective operation presence compared to others
in the industry. Focus on
retail presence will be
profitable. It will increase
the product accessibility
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26. 6. To what extent can the firm’s core competences sustainably create competitive
advantages for the firm? You can use Barney’s sustainability framework (valuable,
rare, non-limitability, and non-substitutability). Read Barney, J. (1991). Firm
Resources and Sustained Competitive Advantage. Journal of Management, 17(1), 99.
You can also use Grant’s Figure 5.6. Page 136. (20 points)
COMPETITVE VALUABLE RARE NON- NON- ASSESSMENT
ADVANTAGE IMITABLE SUBSTITUTABLE
Brand Y Y N Y Sustainable
recognition
Cost Y N N N Temporary
Efficiency
Inventory Y N N Y Temporary
management
Innovative Y Y Y Y Sustainable
Product
Quality
Effective in- Y N N N Temporary
store
operations
a) The brand recognition of NIKE is the biggest strength for the company. It is valuable and
rare for the company. But since the competition in the sports footwear industry is so high,
it is difficult to say that the brand recognition is non-imitable. Adidas gives a very stiff
competition to NIKE and has good financial ratios. The NIKE/others products are non-
substitutable. The substitution for the athletic footwear is low, as there are little
alternatives available to choose from. The other substitutes available in the footwear
industry are boots, flip-flops, and sandals. But these cannot be used in place of sports
shoes, in any sporty event. Therefore, there are no real substitutes for athletic footwear.
Hence the brand recognition for NIKE is sustainable.
b) The other competitive advantage which is sustainable is the innovative product quality of
NIKE. A lot of technological and scientific research like air sole is deployed to produce
the foot wears at NIKE.IT is constantly involved in the R&D, to produce better products
to consumers. The competitive advantage is valuable and to customers as well as to the
company. Even though there are other competitors, but NIKE has an upper hand in terms
of its product technology making it non-imitable and non substitutable.
c) The competitive advantage of cost leadership and efficient operations are temporary
because other competitors are also doing well in those aspects. NIKE’s chief rival Adidas
has a better cost advantage and over NIKE. The inventory management for Adidas is also
appreciable, making the competitive advantages not non-imitable and non-substitutable.
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27. 7. Draw a Table to show the alignment of the firm’s goals (e.g. strategic measures of
balanced scorecard such as EVA, market share etc), business strategy, underlying
resources and capabilities, competitive advantage, and industry key success factors
(Read: Figure 5.3 page 127 and Table 8.1 page 223). (20 points).
The link of firm’s goal, business strategy, resources and capabilities, competitive advantage
and key success factor
External Environment
Goals Government Regulations
World’s Leading Sports Global Economy
and Fitness Company Competitive sports Industry
Health &Fitness Trend
Technological innovation in
foot wears
Business Strategy
Product
Differentiation
Globalization Key Success Factor
Distinctive Marketing
Extensive R&D
Product Quality
Resources & Capabilities
Financial control Competitive Advantage
Product Design Capability
Brand Name
Reputation
Strategic Innovation Product Quality
Distribution Capability Inventory turnover
Integrated R&D Cost leadership
Efficient Employees
Relationship Management Effective in-store
operations
In order to become the world’s leader in sports industry, NIKE has adopted the generic
business strategy of product differentiation and global expansion in a strategic way to
establish a leader position. Its strategies have been shaped by the external environmental
factors like government regulations, global economy, and competition in industry, health /
fitness trend and technological advancements in the sports products. The business strategies
have also been shaped by firm’s competitive advantages. To develop and maintain its
competitive advantages, NIKE deploys its resources and develops the capabilities to the
fullest. So with the current resource/capabilities, NIKE can posses some more competitive
advantages.
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28. 8. Describe the firm’s organizational structure, processes, systems, culture and functional
strategies (you might need Table 12.5 pages 317 or Table 13.1 page 337) and how do
they support the business model, strategy, competitive advantage, or goals. Draw a
Table that summarizes your findings. (20 points).
Goal World’s leading sports products and equipment provider
Business Market high-end consumer products in sports and fitness
Model manufactured in cost-efficient supply chains
Business Encompasses the business’ overall positioning in the sports
Strategies industry and stay competitive due to the
Product differentiation and globalization
Competitive Brand Name, Product Quality, Inventory turnover, Cost
Advantage leadership, Effective in-store operations
Functional departments such as marketing, production, R&D,
Org. customer services, operations, distribution, human resource with
Structure clearly defined jobs at all levels; collaborative, matrix
organization with professional staff; teams work across footwear,
apparel and equipment product engines; minimal hierarchy in
organization
Systems Automated inventory control; high-tech R&D system;
automated warehouse and distribution systems
Processes Highly innovative product design, volume manufacturing,
outsourcing for manufacturing, distinctive marketing, effective IT,
distinctive R&D, periodic training of employees, tight financial
control
Effectiveness of operations within its manufacturing, marketing,
Functional product development, and customer service processes; highest
Strategy service standard within industry; build loyal customer
relationships around the world to improve its customer services
Well-diversified culture; code of ethics for all
Culture employees/suppliers/buyers called “Inside the Lines”; respect
& value to employees; fast paced & high-tech culture; safe
28 | P a g e working conditions for employees/workers

29. 9. What is the outlook for industry profitability during the five year period 2010 - 2014?
What is the outlook for the firm profitability? What would be the key success factors?
Will the present core competencies of the firm be obsolete? See Table 11.1 page 277. See
also slides (“The Driving Forces of Industry Evolution” and “Preparing for the Future:
The Role of Scenario Analysis in Adapting to Industry Change”) from Chapter 11. You
need understand concept of future KSFs and driving force. Use Figure 3.6 pg. 88 (or
Table 3.3 page 89, Figure 3.7 page 90). Develop two future scenarios and (1) how they
impact of the industry key success factors (2) 1) how they might impact the SWOT or
core competencies (20 points)
Industry profitability during the five year period 2010 – 2014
The study of the annual reports and financial data indicates that the sports industry will be
profitable during the five year period 2010-2014. The impact of the global economic
recession of 2008-2009 on the sports apparel industry was significant. The biggest threat for
any industry would be economic recession. As the economy slows, consumer purchasing
power declines. The labor cost and material price also goes up during recession.
The rivalry is very high in the sports wear industry. The fierce competition among the
industry players lowers the margin for every company in the industry. Thus every company
must maintain competitive advantage to grab market share and generate profit.
The economic conditions are improving since 2010. The improved economic conditions will
prove profitable for the companies in sports wear industry. The purchasing power of the
customers will be improved.
Consumers are becoming more knowledgeable and have more choices when it comes to
sportswear than they did in the past. Today the consumer wants innovative and fashionable
products, especially in apparels and technology. The key success factors on which the sportswear
industry needs to focus, to sustain profitability in the future are; innovation and creativity in
products and services; distinctive marketing; new unsaturated markets like Asian countries.
Product/service Distinctive Distribution New
KSF
Quality & marketing capability unsaturated
innovation capability markets Driving forces
Product /service Emerging Government
technology markets/unsaturated regulations/
market segments economic conditions
Environment
External
Growing Health & Global economic Customer’s buying
fitness trends conditions power/income
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30. Profitability of NIKE during five period 2010-2014
NIKE is a consumer product company and it is exposed to the consumer’s discretionary
income. The decline in the disposable income of the consumers has adversely affected
NIKE’s performance during the global economic crises. The macro-economic conditions like
competition, politics, economy, socio-cultural trend and technology, together affect the
profitability of NIKE.
Now, more than ever, NIKE is expanding its global operations. NIKE’s sales are paid in
several currencies, which increase its exposure to foreign currency exchange rates. Currency
exchange rate fluctuations could also affect the business operation of NIKE. NIKE has a
huge market in Asian countries like India and China. India and China are the fastest growing
economies today. NIKE has realized double digit revenue growth in India, China and other
Asian Pacific companies, in fiscal 2009 and 2010. These markets are not yet at the point of
maturity, so high growth is expected in the near future. At the same time, the revenue growth
in Europe and United States was also high. The projected costs of goods sold as a percentage
of sales is slightly lower than the historical average due to sustainable cost cutting efforts in
2010. The revenue/sales are expected to grow at a rate of 6-7% every year till 2014. Thus the
profitability outlook for the industry as well as NIKE looks attractive.
NIKE will be a profitable company with good growth prospects, great cash flows, improved
EVA & ROCE and high returns to shareholders through dividends.
Revenue Growth Chart for NIKE Inc.
Revenue Growth Forcast
25,000.00
20,000.00
15,000.00
10,000.00 Revenue
5,000.00
0.00
2010 2011 2012 2013 2014
Key success factors are most significant to future success of a firm in industry. The KSFs
contributing toward the NIKE’s profitability in future will still be its distinctive marketing
activities, extensive research and development effort to design premium concert athletic products
for customers, product differentiation and extensive manufacturing, innovating and distribution
capabilities. The core competencies and key success factors will stay the same, they will be
enhanced. For example the product quality will be increased by better products and better
services resulting in improved brand recognition. Thus the core competencies and the key
success factors will not become obsolete for NIKE.
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31. Scenario I
The future period of 2011-2014 has a great opportunity for NIKE to increase its brand loyalty,
market share and revenue. The closest biggest growth opportunity for NIKE is the 2012 Olympic
games scheduled to be held in London. NIKE has turned its attention to London 2012 Olympic
with an ad campaign. NIKE is on the ball and announced it will extend its relationship with the
U.S. Olympic Committee as an Official Outfitter of the U.S. Olympic and Paralympics Teams.
NIKE promises to deliver ground-breaking apparel and footwear with cutting edge technology to
the athletes. NIKE is an official marketing partner of the U.S. Olympic Committee, which
guarantees significant TV exposure in the U.S, especially during such events as the basketball
tournament. At the same time NIKE will replace Adidas division Reebok as the league's official
uniform provider, giving the company even more exposure among local consumers.
NIKE has been the best when it comes to advertising. Some of the celebrities who will advertise
for NIKE during the Olympics will be USA Basketball NBA stars like Kobe Bryant, LeBron
James, and Carmelo Anthony.
In this scenario NIKE will embrace the key success factor of it distinctive marketing capabilities,
innovation and distribution capability.
NIKE is also coming up with the new automatic self lacing sneakers. The automatic lacing
system provides a set of straps that can be automatically opened and closed to switch between a
loosened and tightened position.
Thus NIKE will embrace the key success factor of extensive research and development effort to
design premium concert athletic products for customers and product differentiation.
NIKE self
lacing
automatics
sneakers
(Google image)
Scenario II
The United States is the largest and most saturated market for NIKE. The Company has been
directing efforts on expanding into emerging markets which offer growth opportunities. It has a
huge market in Asian countries like India and China. India and China are the fastest growing
economies today. NIKE has realized double digit revenue growth in India, China and other Asian
Pacific companies, in fiscal 2009 and 2010. These markets are not yet at the point of maturity, so
high growth is expected in the near to mid-term future
NIKE has planned to expand its global retail foothold by opening 250 to 300 new stores over the
world by year 2014. NIKE's expansion plan includes a mix of discount-minded NIKE Factory
31 | P a g e

32. Stores in outlet malls and NIKE town stores, which sell newer and exclusive items and are often
found in upscale shopping centers. It will also focus on the women-oriented stores to boost the
proportion of its women's business from about one-fifth of total sales. Thus the company is
trying to attract both the segment of customers i.e. price sensitive and premium class. NIKE’s
strategy is consistent with its business level strategy of product differentiation and expansion.
In this scenario NIKE will embrace the key success factor of it distinctive marketing capabilities,
innovation and distribution capability.
Thus expansion in the emerging new markets and new segments of consumers will provide
growth opportunities for NIKE.
The scenarios explained above are in synchronization with the SWOT of NIKE. The analysis is
as follows:
a) The biggest strength of NIKE is its brand recognition and brand loyalty. With the
expansion into new emerging markets and focusing on the growing women athletes,
NIKE will continue to hold its consistent brand recognition globally in all consumer
segments.
b) The global expansion is also an opportunity for the company’s growth.
c) Product technology and innovation has always been strength and key success factor for
NIKE. Its new automatic self lacing sneaker an innovation which will attract athletes and
younger generation.
d) NIKE advertising capabilities are also one of its strengths. Its plan to become an official
marketing partner of the U.S. Olympic Committee, staring NBA stars is correlated to its
distinctive marketing and advertising capability.
e) The United States is the largest and most saturated market for NIKE. This is a threat for
the company. Thus the Company has been directing efforts on expanding into emerging
markets which offer growth opportunities.
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33. 10. In order to improve its performance, please explain how the firm can use its current (or
revise or build) strategy and supporting resources and capabilities to seize the
opportunity and defend against competitive and other. Make your recommendation to
the firm (operational and strategic). Please capitalize your answers on your previous
questions’ answers. You may use SWOT concept. You might need Figure 9.1 page 231,
Figure 9.4 page 241, Figure 10.5 page 260 and Strategy Capsule 10.2. page 261. You
need to read chapter 11 as well. If the firm that you pick is in high technology industry
then you need to read chapter 12. If the firm that you pick is in mature industry then
you need to read chapter 13. (20 points)
Opportunities Threats
Expansion into Demand for Revenue relies Intense
on consumers’ competition
emerging innovative
discretionary
market products
income
High
dependency on
Rise in the Foreign overseas
number of Exchange manufacturing
women athletes Risk & outsourcing
Capitalize Defend Migrate
Strengths Weaknesses
Brand equity, global presence, product Currency exposure, decreasing market in
quality, diverse product line, strong R&D, United States
Distinctive marketing capability
Strategy
Product differentiation strategy, globalization/Expansion strategy, cost reduction/efficiency
Operations
1. Achieve economies of 4.Market place 7. Foreign exchange 9. Continue expansion
scale in manufacturing management to fight risk management operations outside the
and distribution competition program to minimize home country
2.Continue with product 5. Improve financial volatility of currency 10. Work with
innovation through controls for better cash fluctuations customers to design new
NIKE Sport Research turnovers 8. Focus on women product idea &
Lab 6. Social activities to athletes products strengthen relationship
3. Focus on online/retail strengthen brand image
store presence
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34. NIKE operates in a highly competitive and rapidly changing industry. It is difficult for a
company to remain competitive and sustain profitability in this industry. Though NIKE has been
a leader in the industry but it has some weaknesses and faces threats which could negatively
affect its financial performance.
Suggestions for NIKE to improve its performance, with its current capabilities/resources
and business strategies are:
1) Improve the functional level strategies in manufacturing and distribution and customer
service processes to improve operations in the company.
2) NIKE is the product innovator in the sportswear industry. It should continue with its
product innovation through its Sports Research Lab.
3) NIKE competes with countless athletic and leisure shoe companies on a worldwide
basis. It should strengthen its aptitude to discover and define product trends as well as
foresee and respond to changing end user demands as promptly as possible to maintain
market share. Thus it should focus more on market place management.
4) NIKE operates on global basis. It is exposed to fluctuating currency risk. It should adapt
foreign exchange risk management programs to mitigate such risks.
5) It should to continue its expansion outside USA to take opportunities in the unsaturated
foreign markets to improve performance and sustain leadership in the industry.
6) It should encourage its consumers to participate in product design like its touch screen
technology in store allowing customers to design shoes of choice. This would also
strengthen its customer relationship and enhance customer loyalty.
7) Focus on the unsaturated women athletes segment. It can also focus on the younger
generation fashion clothing.
8) NIKE’s products are subject to risks associated with overseas sourcing and
manufacturing. It should look for alternative sources of raw material and manufacturing
options in order to lessen the dependency. It can go for its own manufacturing units in
home country.
9) Make a strong online as well as retail store presence.
10) Participate in social activities and responsibilities to improve and enhance brand image.
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35. 11. Now position yourself as the strategist for the firm’s competitor, how will be your
strategy look like i.e. how can you neutralize or outcompete it (the recommendation
mentioned in question 7). Read Grant Figure 4.2. Page 106 (20 points)?
Adidas is the chief rival of NIKE. The A framework for Adidas’s analysis is as follows:
Objectives
The key objective is to become the
leading sports brand in the world by
reinforcing its position as an innovator Predictions
and technologically savvy marketer in Adidas will focus more on the
sportswear industry i.e. leading through product differentiation strategy
innovation. just like NIKE, to improve its
product quality and enhance its
product line. Since women
Strategy athletes is a fast growing segment,
The business strategy is product Adidas can also focus on this
differentiation with a diverse brand strategy.
portfolio, expansion i.e. investments Adidas in competing fiercely with
focused on highest-potential markets NIKE globally. It has been
and channels. competing on price and
technology with others. But
consumers have become more
knowledgeable and look for
Assumptions innovation and variety. To
capitalize on this reality, adidas
The sportswear industry is at the
will focus on NIKE’s business
maturity stage of the product life cycle.
strategy and create a
The market is basically experiencing a differentiated product experience
slowdown in sales growth because the at competitive price that are better
products have achieved acceptance by
tailored to specific consumers.
their most potential buyers. Adidas will focus on its cost
structure to minimize cost.
Adidas will focus more on the
retail presence to give NIKE a
Resources & Capabilities hard time.
Technological capability Adidas might focus on sponsoring
Customer focus upcoming sporty events.
Brand Recognition
Supply chain management
Effective Marketing capability
Strong distribution capability
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36. The other strategic recommendations for the competitor will be as follows:-
1) Target the emerging economies of the world e.g. Latin America, East Europe and
Asia, where NIKE is trying to expand and deepen its root.
2) Strategic and financial planning to become more cost-efficient than NIKE.
3) Strengthen the cash management, which is NIKE’s weakness.
4) Promote the female athletes and sponsor more women sports events.
5) Focus on product innovation which will give a technological advantage over NIKE.
6) Focus on the right strategic acquisitions areas were where NIKE is trying to make a
significant presence like training and fitness clubs.
7) Focus on the price sensitive segment of customers like college and school students.
8) Employ specialists to strengthen the brand image through advertising, and social
activity.
9) Improve working conditions in company to be more sought after than NIKE. This
will ensure we get the best talent in the industry.
10) Open more retail stores, as NIKE has less retail store presence.
11) Research the international market to find out the latest trend in kids and women
apparel products.
12) Enhance adidas online market more than NIKE.
13) Offer product with high quality like NIKE.
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37. 12. According to the DCF (discounted cash flows) paradigm, value drivers of a firm are
such as sales growth, operating profit margin, and cash tax rate, proportion of net
working capital to sales, proportion of fixed assets to sales, and proportion of other long
term assets to sales. These value drivers can be used to estimate a firm’s future free
cash flows (ultimately the firm’s value). Based on your analysis above (Q1-Q11)
propose a strategic plan that can improve the firm’s future free cash flows (i.e. by
improving its value drivers). Read file FCF drivers.doc in your Blackboard vista.
Website wikiwealth.com might help. Identify which value drivers that can be improved
and justify. Calculate the potential value creation of your proposed strategic plan.
Assume that the firm has certain competitive advantage period and the residual value is
the firm’s book value. For example, competitive advantage period of 4 year suggests
that there won’t be any economic profit created after year four. Thus, the residual
value is the perpetuity value of the firm’s book value at year four and discounted at t =
4. Make your own assumption as necessary. (20)
Value Drivers Historical Proportion New Business strategy
Sales growth 5% 5%
Operating profit margin 10.03% 10.03%
Cash tax rate 24.2% 24.2%
Net working capital/sales 24.24% 24.24%
Fixed assets/ sales 13.60% 13.60%
Other long term assets/ sales 5 5
Cost of capital 8.9% 7.0%
Competitive advantage 2 2
period
The value driver that is changed is the cost of capital. Let’s assume that the new business
strategy will change the cost of capital Wacc to 7.9%. The value of all the other drivers remains
the same. The historical values refer to the values of the FCF drivers in year 2010.
From the table below,
The value of the firm with the old business strategy was $641700.54 million
The value of the firm with the new business strategy is $1563201.00 million
Value of Firm new - Value of Firm2010 = 921500.46
Thus decreasing the cost of capital by approximately 1% increases the value creation by
921500.46 million. If other value drivers are also improved at the same time, the value of the
firm can be improved and enhanced to a great extent.
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38. Calculations
FCF 2010
$2,045.31
WACC 8.90%
WACCnew 7.00%
g 5%
HV1 FCF2010(1+g)/WACC- g )
HV1 55066.0385
Value of Firm2010 (FCF2010+ HV1)/WACC
Value of Firm2010 641700.54
HV2 FCF2010(1+g)/(WACCnew –g )
HV2 107378.78
Value of Firm new (FCF2010+ HV2)/WACCnew
Value of Firm new 1563201.00
* HV – Horizon Value
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39. 13. Bonus question (optional): Use line graph to show the development of the elements of
ROCE of the firm and its competitor (5 points).
The line graphs show the development of the elements of ROCE of NIKE and Adidas from
2006-2009
COGS %
60
50
40
30
20 Nike
10 Adidas
0
2006 2007 2008 2009
Year
SG&A% Profile
50
40
SG&A%
30
20 Nike
10 Adidas
0
2006 2007 2008 2009
Year
ROCE Profile
25.00%
20.00%
15.00%
10.00% Nike
5.00%
Adidas
0.00%
2006 2007 2008 2009
Year
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40. Depreciation Profile
3.5
3
Depreciation%
2.5
2
1.5
Nike
1
Adidas
0.5
0
2006 2007 2008 2009
Year
Invetory turnover ratios
10
Inventory turnover
8
6
4 Nike
2 Adidas
0
2006 2007 2008 2009
year
Net Margin profile
12
10
Net margin
8
6
4 Nike
2 Adidas
0
2006 2007 2008 2009
Year
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41. A/R turnover Profile
10
8
A/R Turnover
6
4 Nike
2 Adidas
0
2006 2007 2008 2009
Year
Asset Turnover ratio profile
1.6
Asset turnover ratio
1.4
1.2
1
0.8
0.6 Nike
0.4 Adidas
0.2
0
2006 2007 2008 2009
Year
Cash Turnover profile
25
Cash Turnover
20
15
10 Nike
5 Adidas
0
2006 2007 2008 2009
Year
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