NIKE, Inc. Memo #3 by Collin Myers

Memorandum #3

Collin J. Myers BUS-458 Spring 2013

Collin J. Myers

NIKE Memorandum #3 The athletic footwear, apparel, and equipment industry is keenly competitive in the United States and on a worldwide basis. NIKE competes internationally with a vast number of athletic and leisure shoe companies, athletic and leisure apparel companies, sports equipment companies, and large companies having diversified lines of athletic and leisure shoes, apparel, and equipment.1 The intense competition stems from the rapid changes in technology and consumer preference towards the athletic and leisure footwear, apparel, and equipment markets.2 Characteristics that constitute success in this industry are: performance and reliability of products (shoes, apparel, and equipment), new product development, price, product identity through marketing and promotion, and customer support and service.3 The global economic recession resulted in a significant slow-down in international trade and a sharp rise in protectionist views around the world.4 These trends are affecting many global manufacturing and service sectors, including the footwear and apparel industries.5 Companies in NIKE’s industry are facing trade challenges in many different regions. NIKE is working together with competitors to address trade issues to reduce the impact to the industry, while observing applicable competition laws.6 These efforts could result in increases in Selling, General and

http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 3 http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 4 NIKE FY2012 Annual Report, “Mark Parker Letter” 5 NIKE FY2012 Annual Report, “Mark Parker Letter” 6 http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 2

Administrative expenses (SG&A), which would affect NIKEâ&#x20AC;&#x2122;s sales or profitability and the imported footwear and apparel industry as a whole.7 At NIKE everything starts with the consumer. Consumer insights enable NIKE to innovate and add strength to the NIKE portfolio - footwear, apparel, category, brand and distribution.8 NIKE strives to communicate with the consumer in an effort to deliver the most innovative products on the market. Innovation at NIKE is about leveraging new ideas, expanding into new spaces, driving through new channels and investing for longterm stability.9 NIKE innovates for three main purposes: to serve the athlete, to grow the company, and to inspire the world.10NIKE has transformed these missions into actions by creating NIKE Digital Sport in 2010. â&#x20AC;&#x153;Our consumer focused strategy enhances our ability to deliver great product and elevated consumer experiences which will help grow the NIKE Brand to approximately $23 billion by the end of fiscal 2015.â&#x20AC;? Mark Parker, President & CEO NIKE, INC.11 Digital Digital aims to develop devices and technologies that allow users to track their personal statistics in any sport that they participate.12 Digital has become an integral part of NIKE and every industry it competes in. The potential in digital lies in the ability to deliver new kinds of feedback to customers.13 The world has become an industry free-for-all with numerous meanings. Digital can represent: technology, a platform, data,

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http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf

http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w 20vs9.pdf 9 http://www.nikeresponsibility.com/report/content/chapter/business-overview 10 http://www.nikeresponsibility.com/report/content/chapter/business-overview 11 http://news.thomasnet.com/green_clean/2012/05/14/nikes-sustainability-strategy-reshapes-a-globalmanufacturing-network/ 12 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future 13 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future

Collin J. Myers

a product, a sensor, a service, or a community.14 NIKE is using the digital craze as an amplifier to strengthen their relationship with the consumer. NIKE digital strives to listen to the athlete, connect with the consumer, enhance performance, expand the experience of the sport, and help others reach their full potential.15 “Digital at NIKE is like Innovation at NIKE - it enables growth and opportunity for the brand” Charlie Denson, President, NIKE Brand.16 NIKE has chosen to focus their investments for digital in; Digital-enabled Products and Services, Brand Communications and E-Commerce.17 NIKE has started by expanding on their successful NIKE+ running sensor, the blockbuster performancetracking tool developed with Apple in 2006.18 Some 5 million runners now log on to NIKE+ to check their performance.19 New products such as the NIKE FuelBand (digital wristband) have brought NIKE+ continued growth in the form of further connection with consumers. Products like FuelBand, which gives users real-time updates on how many calories they’ve burned or steps they’ve taken throughout the day, often serve as a

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http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w 20vs9.pdf 19 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future IV

motivating force to elicit more energy output.20 The wristband offers simple color cues to encourage more activity from users (Red = less active, Green = more active).21 Digital Connection NIKEâ&#x20AC;&#x2122;s digital division is not only about creating must have gadgets; it is also an opportunity for NIKE to analyze consumersâ&#x20AC;&#x2122; data. This means NIKE can follow consumers, build an online community for them, and forge a tighter relationship with them than ever before. This is part of a bigger broader opportunity seen by one of the worldâ&#x20AC;&#x2122;s greatest marketers. This further connection is fueled by NIKE content and campaigns, which are designed to be personal and surgical.22 NIKE has reduced spending on TV and print advertising in the US by 40% over the past three years [Fig. 1].23 In their place is a whole new portfolio of interactive strategies that allow NIKE to further connect with its customers. Examples of this are: NIKE Fuel Band, a 30-story billboard in Johannesburg that posts fan headlines from twitter [Fig. 2], and a major commercial shot by an Oscar-nominated director that made its debut not on primetime television but on Facebook.24 This ensures that connections with consumers remain deep, meaningful, and relevant. An investment in e-commerce has become an integral part of the digital craze for NIKE and the entire industry.25NIKE has taken into account the trends of consumers in their tweens. NIKE realizes that many of their core customers spend most of their time 20 21 22

http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future

http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w 20vs9.pdf 23 http://management.fortune.cnn.com/2012/02/13/nike-digital-marketing/ 24 http://management.fortune.cnn.com/2012/02/13/nike-digital-marketing/ 25

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Collin J. Myers

on Twitter, Facebook, or Instagram.26 E-commerce grants NIKE customers the ease of researching, comparing, purchasing, and customizing NIKE products on their terms around the world.27 An investment in e-commerce allows consumers to view NIKE innovation before buying it, enabling them to become a part of the innovation. â&#x20AC;&#x153;We are just beginning to tap into the potential of digital technology, but we believe the opportunity to drive growth long-term is incredible and weâ&#x20AC;&#x2122;ll be investing accordingly to capture that potential in product, brand and e-commerceâ&#x20AC;? Mark Parker, President & CEO, NIKE, Inc.28 Digital Future The future of NIKE Digital will be based around customization and connection.29 NIKE has not yet revealed anything further, but it is certain that they are working on big things. NIKE has made hints towards technology that relates to syncing music with heart rate and the benefits of audio feedback.30 Another area of focus for the future of Digital will be visual feedback. NIKE has also hinted towards the benefits of using color to enhance the experience of the athlete.31 Overall, advancements in Digital will be based around improving the experience and lifestyle of the consumer. Hints to NIKEs Digital future are as follows: "Just imagine if your body could control or change the music that you're listening to--if your movement could actually change the cadence of the music, the tempo, or the beat. Sound--there's a lot of things going on in that area that are very exciting," "So there could be new ways to get feedback--through audio feedback--for how your body is

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http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w 20vs9.pdf 28 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future 29 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future 30 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future 31 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future VI

performing. The same could happen with heart rate." Mark Parker, President & CEO, NIKE, Inc.32 "Visual feedback is another area of interest. Rather than use one universal color code for activity, imagine more specific uses of visual feedback. These are examples of ways that you can bring the performance of your body alive through different sensory inputs. Color is one: if your heart rate was converted into color, or your movement was converted into color. But it's all about giving the athlete more feedback and helping use that feedback or interpret that feedback in a way that's going to improve their performance or their level of fitness or just make the experience a lot more interesting." Mark Parker, President & CEO, NIKE, Inc.33 “Nike's digital future is likely to involve more personalization. How can we understand more about you, learn more about your motivation, so we have our whole exploration around making this better for you by knowing more about what you need? This is what we call “new, smarter hardware."” Nike Digital Sport Division VP, Stefan Olander.34 NIKE’s business level strategy represents a product differentiator. NIKE’s strategy is to achieve long-term revenue growth by creating innovative “must have” products (NIKE Flyknit Technology), building deep personal consumer connections with their brands (Digital), and delivering compelling consumer experiences at retail and online (DTC Businesses).35 As a result, NIKE has created what they call their Category Offense to ensure customer demand is met.36 NIKEs category teams live the lives of the athletes in each sport of NIKEs portfolio, mining for insights that help NIKE innovate new ways to improve performance and experience.37 NIKE has also made a significant investment into the development of their Direct to Consumer Business’ (DTC), growing

http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future 34 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future 35 NIKE FY 2013 Q2 Earnings Summary 36 http://www.nikeresponsibility.com/report/content/chapter/business-overview 37 http://www.nikeresponsibility.com/report/content/chapter/business-overview 33

Collin J. Myers

23% in fiscal year 2012 alone.38 DTC Business’ represent the stores and websites NIKE operates which is part of their Digital Services pillar of sustainability.39 NIKE’s corporate level strategy represents moderate to high levels of diversification. Related constrained would best represent the products NIKE sells. NIKE is the world’s leading designer, marketer and distributer of athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities.40 NIKE Brand footwear continues to be the cornerstone of revenues, alone generating $13.4 billion, representing 55% of total revenues [Fig. 3].41 NIKE Brand apparel accounts for 30% of revenues [Fig. 3]42, while equipment (5%) and other business’s (12.8%) (Hurley, Jordan & Converse Brands) round out the rest of the portfolio.43 NIKE footwear, apparel, and equipment all share similar R&D, manufacturing processes and raw materials. NIKE diversifies their footwear selection by sport, which are: Running, Basketball, Football, Soccer, Men’s Training, Women’s Training, NIKE Golf, NIKE Sportswear and Action Sports (Snowboarding, NIKE SB, etc.).44 As a result, NIKE is able to successfully compete in the world’s largest sporting markets. The level of diversification in NIKE’s product markets is perfectly in-line with their mission, “To bring inspiration and innovation to every athlete* in the world. *”If you have a body, you are an athlete.””45

NIKE FY2012 Annual Report, “Mark Parker Letter” http://www.nikeresponsibility.com/report/content/chapter/business-overview 40 ttp://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 41 http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 42 http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 43 http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 44 http://www.nikeresponsibility.com/report/content/chapter/our-sustainability-strategy 45 http://help-en-us.nike.com/app/answers/detail/a_id/113/p/3897 39

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NIKE also diversifies itself further through their affiliate brands (Jordan Brand, Hurley Int. and Converse). These brands allow NIKE to participate in markets that represent more than athletic performance. NIKE affiliate brands represent youth lifestyle brands that inspire young generations of consumers.46 NIKE’s innovation standards held for the NIKE Brand stay true through the affiliate brands, earning Hurley the ‘Board short of the Year’ award for 4 consecutive years.47 The Jordan Brand is one of the most sought after lifestyle brands of the 21st century. The iconic “Jumpman” logo is known all over the world as a sign of elite sporting products that can be priced at a premium. A primary driver for diversification for NIKE would be there size and the amount of leverage NIKE has on consumers and athletes. NIKE in past years has been able to make a staple for themselves in many new sporting markets such as: Snowboarding, Skateboarding, Golf, Lacrosse, Weight Lifting and Soccer. NIKE has been able to succeed in these markets due to two factors, athlete representation and money. NIKE has the human capital and cash to expand to almost any sporting market they desire. When entering a new product market NIKE is able to fund adequate R&D projects and seek out the best athletes within these markets to represent their new products (mostly through unmatchable endorsement deals) (i.e. Tiger Woods). NIKE’s consumer image and lifestyle they offer customers is also a driver of diversification. NIKE has a large cult following of loyal customers that will support NIKE for all their sporting needs. This is a result of NIKE’s innovative and progressive culture that inspires the youth and middle age consumer.

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http://www.nikeresponsibility.com/report/content/chapter/our-sustainability-strategy http://www.hurley.com/blog/blog.cfm/aid/49344/4X-SIMA-BOARDSHORT-OF-THE-YEAR

Collin J. Myers

NIKE, Inc. sells, distributes and licenses its products in approximately 200 countries around the world.48 Operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets.49 NIKE’s international corporate level strategy represents a global strategy. NIKE headquarters in Beaverton, Oregon determines the business strategies that are to be used in each country or region.50 NIKE’s executive team is quite vast with over 50 positions due to the amount of different markets and regions NIKE has in their portfolio. NIKE has what they call ‘NIKE’s Global Senior Team’, which are individuals that lead NIKE business and growth strategies.51 Senior management roles that deal with global operations are: President (Global Operations), VP (Global Brand & Category Management).52 NIKE’s organizational structure reflects a collaborative environment, or a ‘matrix organization’.53 In a matrix organization, team members report to two areas, product manager (Geography) as well as the department manager (Global Function) [Fig. 4].54 NIKE products sold in China represent an area of higher customization than other foreign markets. Social norms and standards are vastly different in China in the form of fit, color and theme. NIKE releases yearly special products for the Chinese New Year and other holidays. As a result, NIKE launched new apparel styles with the ‘new fit’

http://www.nikeresponsibility.com/report/content/chapter/business-overview http://www.nikeresponsibility.com/report/content/chapter/business-overview 50 http://www.nikeresponsibility.com/report/content/chapter/business-overview 51 http://investors.nikeinc.com/Investors/Corporate-Governance/NIKE-Inc-Management/default.aspx 52 http://investors.nikeinc.com/Investors/Corporate-Governance/NIKE-Inc-Management/default.aspx 53 Nike's Flat Organizational Structure | eHow.com http://www.ehow.com/facts_6887850_nike_s-flatorganizational-structure.html#ixzz2K0HbaH95 54 http://www.nikeresponsibility.com/report/content/chapter/our-sustainability-strategy 49

and ‘silhouettes’ lines launched for the Holiday 2012 season.55 The products sold in North America, Western Europe, and Central & Eastern Europe are quite similar. The difference between these products is mostly apparel orientated due to the amount of team-orientated sportswear NIKE sells. NIKE’s future goals mostly deal with refining the business’s they already operate. New technologies in Digital will be vital to keep consumers’ lifestyles connected with NIKE and will help NIKE stay connected with them. Technologies such as ‘FlyKnit’, NIKE+, and Fuel Band are too new to determine the benefits, but they will show their true colors over the next fiscal year. NIKE’s investments in Digital represent strategic inflection points for the industry. The benefits of these investments will be seen at the end of fiscal 2013.

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Collin J. Myers

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References NIKE, Inc., Strategy “Business Overview”. http://www.nikeresponsibility.com/report/content/chapter/business-overview NIKE FY2012 Annual Report, “Mark Parker Letter” NIKE FY 2013 Q2 Earnings Summary NIKE 2012 Annual Report, “Form 10K”.http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012form-10K.pdf Nike, Inc., Strategy, “Our Sustainability Strategy”.http://www.nikeresponsibility.com/report/content/chapter/our-sustainabilitystrategy Dwight Chestnut, NIke’s Flat Organizational Structure.Nike's Flat Organizational Structure | eHow.com http://www.ehow.com/facts_6887850_nike_s-flat-organizationalstructure.html#ixzz2K0HbaH95 NIKE, Inc.Management. http://investors.nikeinc.com/Investors/CorporateGovernance/NIKE-Inc-Management/default.aspx 4X Sima Boardshort Of The Year. February 10, 2012.http://www.hurley.com/blog/blog.cfm/aid/49344/4X-SIMA-BOARDSHORT-OFTHE-YEAR http://help-en-us.nike.com/app/answers/detail/a_id/113/p/3897 FY 2013 Q2 Earnings Release Conference Call Transcript. December 20, 2012./http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release %20Transcript_v001_w20vs9.pdf Al Brendenberg, imt green & clean journal “Nike’s Sustainability Strategy Reshapes a Global Manufacturing Network”. May, 14th 2012. http://news.thomasnet.com/green_clean/2012/05/14/nikes-sustainability-strategyreshapes-a-global-manufacturing-network/ Auston Carr, Most Innovative Companies 2013, “NIKE CEO Mark Parker On His Company’s Digital Future”.http://www.fastcompany.com/3005528/most-innovativecompanies-mark-parker-nikes-digital-future Scott Cendrowski, NIKE’s New Marketing Mojo. February 13, 2012. http://management.fortune.cnn.com/2012/02/13/nike-digital-marketing/

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