Nike Inc.

Nike is the world’s leading brand in manufacturing and selling sportswear and apparel. Over the years, the company has expanded across all the continents with an increase in customers. The company’s value-based pricing strategy has been one of the most important factors that have driven Nike’s differentiation strategy. This is evidenced by the fact that despite increasing the prices of its products Nike has continued raking huge profit margins locally and abroad. One of their key foreign operations is in China. China is Nike’s fastest growing markets in the world. As a result, it has reset its strategy to involve a more consumer-centric approach and re-profiled both stores owed by retailers and its companies. In turn, the company’s European base is in the Netherlands and enables Nike to effectively target the European market. To protect itself against risks associated with currency exchange, Nike uses currency futures, ETFs, and options. Over time, it has come to light that increase in strength of dollar plunges the firm’s profitability. Generally, Nike is still in a strong financial position with great future prospects.

Nike is a multinational corporation based in America. The company specializes in making, marketing, and selling apparel, footwear, accessories, and equipment worldwide. Headquarters of the company are located in Portland metropolitan area. To date, Nike is the largest supplier of apparel and athletic shoes, as well as the major manufacturer of equipment used in sports. As of 2012, the company employed least 44,000 people globally (Team, 2016). Its value has increased over the years. As of 2017, it was valued at $29.6 billion (Team, 2016). On the same note, in the 2018 Fortune 500 it is ranked at position 89 (Team, 2016). Marketing of Nike products happens under the company’s brand, as well as under Air Jordan, Nike Golf, Air Force 1, Nike Blazers, Nike CR7, and Air Max. The company’s subsidiaries include: Converse, Hurley International, and Brand Jordan. The company has performed well since 2013 after becoming a member of Dow Jones Industrial Average by replacing Alcoa. For instance, at the end of 2013 the company’s quarterly profit increased by 13% in worldwide orders for its merchandise since the month of April (Team, 2016). In November of 2015, the company publicized a share buyback initiative at $12 billion and 2 for 1 stock split with share to start trading at a lower price (Team, 2016). This split was the 7th in the history of Nike. As of June of this year, the American corporation announced its plan to buyback $15 billion over 4 years to start in 2019, following completion of the previous buyback program. For 2018 fiscal year, it reported US$1.933 in earnings with the annual income of US$36.397 billion, representing 6% increase over the past fiscal cycle (Team, 2016). In fact, in October of 2018 the company’s shares were traded above $72 per share and it amounted to US 114.5 billion in valuation of its market capitalization. To gain better understanding of Nike, Inc., it is important to discuss how it calculates its costs and revenues, how its foreign operations contribute to the parent firm, strategies to hedge against exchange rate risk, and the effect of increasing or decreasing value of dollar exchange on the profitability of the firm.

Production and Operation of Nike

Nike uses a vertically integrated model to produce its footwear and involves a two-stage process. In the first stage, Nike extracts and sources various inputs of production such as PVC, leather, and organic cotton from nearby factories. In the second stage, the company transforms the obtained raw materials by sending them to factories for manufacturing. The transformation of the raw materials into finished products involves four steps. Firstly, the machine cuts the shoe shapes (Watford, 2014). The second step entails developing the inside hold of the shoe. Thirdly, the mid-sole is attached to the upper insole through controlled heating. Step four is the last step of the manufacturing process in which the outcome is a finished product and waste (Pandey, 2017). Some of the wastes are recyclable, while others are not. For the recyclable wastes, they are retreated and reused in the production process.

With regards to the operation, Nike forecasts, controls, designs, operates, and schedules its operations in the production of the footwear. It has an excellent operations management that it has developed during the long-term operation. The good operation management has enabled the company to achieve efficiency and use few resources to produce finished goods. Besides, the company effectively satisfies customers’ needs and prioritizing this has seen it become successful despite fierce competition from giant companies such as Puma and Adidas (Pandey, 2017). Nike primarily manufactures footwear, maintains its equipment, controls the production process, supervises and trains employees, adopts a strategic manufacturing policy, analyzes its systems, examines the production, manages the costs, and plans how to source and use raw materials (Watford, 2014). It considers these tasks to be crucial in its operation process.

Marketing and Sales of Nike

Nike produces footwear and apparel for sports. It has established its production facilities near the raw materials to reduce labor prices. The company’s pricing strategy is competitive as compared to its competitors. However, the cost of the footwear is not universal and varies depending on the type and size of the shoe. For instance, comfortable and good shoes cost $70-$16 (Nike, n.d.). The company makes the sales through individual stores, major malls, and departmental stores that sell shoes in different parts of the world. Although Nike has retailers in 200 countries, most of them are in the United States (over 20,000 retailers) (Pandey, 2017). Besides, Nike sells through individuals, auxiliaries, and licensees. Furthermore, Nike has production and operation facilities and customer services in all the countries where it operates. Additionally, it uses the online platform to promote and sell the products (Pandey, 2017). To market the products, the company uses celebrities, for instance, Brazilian football legend Ronaldo. It sponsors events such as Hoop It Up as the other marketing strategy.

Human Resources of Nike

Nike adopts a number of unique practices in HR. First, Nike uses the free agent HR model (Hansen, 2007). The model requires every employee to undergo rigorous interview processes to validate the prospective of employability. Notably, Nike is one of the companies that encourages life/work balance to enable people to achieve optimum balance in their lives. In this regards, the company offers Paid Time Off, Jury Duty, paid holidays, long-term care, adopted assistance, flexible work schedules, auto insurance, and military leave. Additionally, the company also has Black Employee and Friends Network, which seek to offer sufficient support system to its Black employees in order to ensure a successful transition into the company’s corporate culture.

Organization Design and Structure and the Management Information System in Nike

Nike has a flat organizational structure that enhances transparency and agility among workers. The sub-divisions in the arrangement minimize bureaucracy and implementation time of new concepts. A flat organizational structure empowers employees to make decisions to improve customer satisfaction. Besides, this structure encourages creativity among employees (Bogaert & Clarke, 2018). With regards to the management information system in Nike, the company makes a lot of sales from its website (Nike, n.d.). It also uses the site to monitor transactions, as well as identify those products that are purchased more online and products it can sell more in stores. Nike uses customer-to-business communications to send customers emails that remind them that it has produced certain products or will produce them soon. As a result, customers come out in large numbers to check the products they have been notified of (Watford, 2014). Although most companies use this marketing strategy, a lot of people check emails from Nike, considering that the company produces high-quality products and is well-known.

Finance

Financial activities and policies of Nike, Inc. are overseen by the Finance Committee. The body reviews the company’s annual budget, reviews proposed expenditures, proposed acquisitions, mergers, business divestitures, capital market transactions, dividend policies, management of foreign exchange and interest rates, as well as and approves or reject entry into swap transactions (Mahdi, Abbas, & Mazar, 2015). Nike uses supply chain finance to improve the company’s cash flow (Mahdi et al., 2015). This allows buyers to extend payment terms given to suppliers as a strategy of mitigating the effect of extension of terms of payments and accelerating cash flow. This ensures the company’s supply chain finance occurs of the balance sheet without increasing financial debt. For 3 months preceding 31 August of 2018, the company’s revenues experienced a 10% increment to 9.5 billion (Investors News Details, 2018). Moreover, the net income increased by 15 percent to $1.09 Billion. Nike’s net income reaps benefits from merchandise margins with an increase of 1 percent to 44.2% (Investors News Details, 2018). Thus, Nike, Inc. is in a stable and healthy financial situation.

Pricing

Nike prices its products in dollars. Running shoes are sold by Nike at different prices depending on the country. In South America, the highest price of $104.23 is in Ecuador, while the lowest price of $63 is charged in Chile. In Central America, the highest price is $95.62 in Panama and the lowest is $63.98 in Mexico. In the world, the highest price of Nike’s running shoes is $145.39 in Iceland, whereas the lowest is $31.36 in Kosovo. The following figure shows the trends in Nike selling process and increase in unit sales.

Nike currently employs value-based pricing. This strategy entails setting price according to the value customers attach to the product. The majority of its competitors use the same logic of selling products cheaply at a price that guarantees more sales. However, Nike seeks to deliver the best value for its customers. In other words, in this company the emphasis is laid on the highest quality characterized by beautiful crafting and innovation at the right price. This strategy works for Nike since it enables the company to promote its products in every advertisement as the top range, thereby persuading customers to buy more products. Nike also uses segmented pricing. This entails adjusting prices according to the target market. For instance, the company manufactures Air Max for both children and adults. However, their prices are drastically different despite the fact that there is no significant variation in the cost of making adult sneakers and children’s sneaker. According to Nike’s CFO Don Blair, “the company has invested a lot of work in its consumer value equation by strengthening the brand and the innovation that is found in our product reflects great consumer value proposition from a greater price points.”

In fiscal year of 2014, the average price of selling Nike’s footwear increased by 5 percent globally and 4 percent in North America. Despite the price increment, the company managed to record gains in the market share in terms of key apparel and footwear in the US and across the world. In 2013, one part of running Nike’s shoes retailed at an average of $66.85 in the US (Team, 2016). Even though the company has some items in the lower price category, it has experienced growth in most categories with respect to models of premium footwear retailing for at least $100 (Team, 2016). The increased prices in upper ranges show higher expenditures and improved labor market on discretionary consumer goods. For instance, the company commands 97 percent share of the footwear in the US market in basketball.

Foreign Operations: China

China

China has increased the amount of profits and revenues Nike reports annually. China is one of its profitable markets aboard and it is vital in the company’s agenda to grow its profits abroad. Nike’s operation in China capitalizes on the growing health and fitness in China. Nike has captured this market to generate an excess of $5 billion and a market share of 10% (Team, 2016). The company registers 27 percent revenue growth from Greater China (Team, 2016). This region was the fastest growing for Nike in 2015. With rise in per capita income in China, Nike will experience tremendous growth in revenues in this region. In 2015, revenues grew 20.5% to $758 million (Team, 2016). In China, Nike has reset its strategy to involve a more consumer-centric approach and re-profiled both stores owed by retailers and its companies. Among sportswear rivals, China holds the top position. The company has leveraged its strong brand perception to increase prices in China. In early 2014, Nike launched its e-commerce platform in the country. The response from the Chinese market has been overwhelming and its online engagement with China has increased with time. As of November of 2015, 32 percent of Nike’s future orders for apparel and footwear were scheduled for being delivered in 4 months from China with the closest region being North America at 14% (Team, 2016). Nike expects to increase its market share in the Asian country to gain $6.5 billion in revenues by 2020 (Team, 2016). Despite the fact that Nike’s market in China is characterized by macroeconomic volatility, the country’s middle class has been experiencing steady growth. Research conducted by ANZ shows that 93% of the Chinese population will fall under the middle class category by 2030 (Team, 2016). Urban areas in the country will have 326 million new middle class citizens between 2014 and 2030 (Team, 2016). This figure exceeds the current population in the US. Furthermore, the company is banking on the fact that basketball has been increasing in popularity in China. In fact, basketball association in the country has revealed that 300 million individuals play basketball regularly, which is approximately the size of the total population in the US (Team, 2016). With uniform deals such as the ones they have been entered into with the NBA, the company will improve visibility of its brand in China. Additionally, Nike uses the country for sweatshops. It has come to light that China is the company’s largest single-sourcing nation with 180 manufacturers and approximately 219 employees (Team, 2016). This implies that China as a country is crucial for the Nike’s goal of reducing the cost of production while increasing profitability through sales of sportswear and apparels.

Europe

Europe contributes to Nike’s profitability by reducing operation costs and providing an easy market for increasing the company’s profits from sales. Europe is a big market for Nike. Europe is characterized by a high number of sporting activities such as soccer and basketball. Existence of numerous athletes and sports personalities from Europe has made the region a prime target for Nike. All of the company’s operations in the region are based in the Netherlands where it also manufactures and then distributes apparel and footwear to the European market. Goods sold in the global market are also manufactured in the Netherlands such as clothing, sporting goods, accessories for children and adults, and winter-wear. Currently, in Europe a high number of athletes wear the company’s shoes. For instance, Nike CR7 has been meant to target customers in Europe who are familiar with Christiano Ronaldo, former Real Madrid forward who is currently playing in Italy for Juventus. In 2014, Nike’s net income for 3 consecutive months increased to $698 million, which is equivalent to 78 cents for every share in comparison to 76 cents per share in the previous years. In the last quarter, Nike sales climbed by 10% in Europe (Investors News Details, 2018). This was a part of $9.8 billion growth in revenues complemented with contributions from the international markets. However, it is important to note that operations in Europe have not yielded high profits like in case of China and North America due to stiff competition from its main rival Adidas. Therefore, Europe is crucial in Nike’s foreign operations and the company will continue profiting from this region with increase in sporting activities, which gives a positive brand image.

Hedging against Exchange Risks

Nike uses common ways to hedge against exchange risks in the market

Currency Futures

Nike uses currency futures to hedge against exchange risks because they require small amount of margin upfront and trade on an exchange. Nike gets currency futures through clearing houses so that the clearing houses are positioned at the other side of each transaction made (Magee, 2013). In almost all cases, this attribute of futures triggers active secondary markets because a seller and a buyer cannot evaluate creditworthiness of one another (Ampomah, Mazouz, & Yin, 2013). In this respect, presence of a clearing house helps to substantially minimize the credit risks linked to all forward contracts (Alssayah & Krishnamurti, 2013). A clearing house enables Nike to take charge of its net positions. The clearing members for Nike are brokerage firms seeking to satisfy their financial and legal requirements set by the exchange and the government (Ampomah et al., 2013). Individual brokers hired by Nike have to deal through respective clearing members to clear transactions. Given this structure, Nike normally gives collateral for clearing members. This is also known as margin requirements.

Currency ETFs

The fact that there are ETFs associated with specific currency such as dollar as the underlying asset implies that it can be employed in hedging against exchange rate risk (Šperanda, 2013). Nike uses this to hedge relatively small amounts from foreign markets.

Currency Options

This methodology offers a feasible option for companies like Nike to hedge against exchange rate risks. This option gives the trader or investor the right to sell or buy currency in a specific amount before or on the expiration date at a particular price. For instance, Nasdaq has currency options in denomination of GBP 10,000, EUR 10,000, and JPY 1,000,000, thereby making them well-suited for Nike in its operations in Europe (Šperanda, 2013). Nike uses both call options and put options. Under call options, the company gets the right to buy an underlying asset at a given price for a particular period of time (Ampomah et al., 2013). In case of a fail in stock to meet the price prior to the expiration date, this option expires. In turn, put options grant the company the right of selling an underlying asset at a certain price (Šperanda, 2013). The writer or the seller is obligated to purchase the stock at the strike price. Nike normally buys put option whenever the price of the underlying stock is expected.

Effect of Increases or Decreases in the Dollar Exchange Value on Nike’s Profitability

A strong dollar (increase in exchange value) will lower the firm’s profitability. For apparels and sportswear manufactured in the US, stronger currency makes them more expensive when sold to other nations (Magee, 2013). This often makes customers switch suppliers and may also reduce the value of sales overseas when converted to dollars. In fact, recent earning by Nike have been tremendously affected by the increase in dollar value. Increase in dollar value has increased Nike’s administrative and selling expense by 17%. On the same note, demand creation expense has increased to $983 million (an increase of 25%), being mainly driven by unfavorable changes in rates of the foreign currency exchange (Investors News Details, 2018). Besides, the operating overhead expense has managed to increase by 14%, reaching $2.1 billion, mainly because of investments made in global capabilities and operations and unfavorable changes in rates of foreign currency exchange (Investors News Details, 2018). Additionally, Nike has experienced a decrease in gross margin 80 basis point to 43.8% due to 90 basis points of bad alterations in foreign currency exchange rates (Investors News Details, 2018). In 2015, the company reported $7.46 billion in its 3rd quarter revenue. This was a 7% increase, but still less than the $7.6 billion consensus by analysts (Investors News Details, 2018). Nike reported that minus the impact of the foreign exchange rates the company would have experienced a revenue increase by 13% (Investors News Details, 2018). This implies that fluctuation in the value of dollar wiped away 5% of possible Nike’s earnings. Therefore, increase in the dollar’s exchange value has often reduced the amount of profits gained by Nike.

In conclusion, Nike’s rise over the decades is associated with the strength of the company’s brand. In major markets like China, North America, and Europe, Nike remains the most reputable brand in terms of design, manufacture, and sales of sportswear. Of all its foreign markets, China is the most profitable because of the Chinese population’s growing love for basketball. Unlike its competitors that lower prices to increase demand for their products, Nike has consistently increased its prices as a way of implementing value-based pricing for its sportswear and apparel. Just like any other company, its profitability has often dwindled because of the market forces such as fluctuation in the value of dollar and competition just to mention a few. To protect itself against such fluctuations and other similar risks, Nike uses currency futures, currency options, and currency ETFs. In numerous instances, these strategies have shielded the company from running into preventable loses. With a strong financial position in the market, growing reputation, and constantly increasing market share locally and aboard, Nike’s trajectory towards success is upwards.