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About Nike Case 8.1: The Challenges of Global Growth

In the 40 years since Phil Knight and Bill Bowerman started Nike, it’s grown into one of America’s largest corporations. In 2005, it ranked 173 on the Fortune 500 in terms of revenues. Much of its growth can be attributed to a business model that calls for both producing and selling products globally.

As a matter of fact, Nike’s operations have never been confined to the United States. Knight started out by selling running shoes made in Japan, and although Nike’s sources have shifted from Japan to such places as China (35 percent), Vietnam (29 percent), Indonesia (21 percent), and Thailand (13 percent)1 , its shoes are still manufactured in Asia. Its apparel is made in about 40 countries2 , and much of the material that goes into Nike products is obtained globally. Nike began selling internationally in 1972, when it made its first foray into Canada, and soon expanded into Europe, the Asia‑Pacific region, Central and South America, the Middle East, and Africa. In fiscal year ended May 2006, sales outside the United States represent 53 percent of Nike’s revenues, and international sales will probably continue to increase at a greater rate than U.S. sales.

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The Pros and Cons of Global Growth

Obviously, then, Nike has benefited greatly from its international operations. Because Knight’s early decision to manufacture shoes in Asia allowed his company to enjoy lower labor and production costs, Nike was able from the outset to produce high‑quality athletic shoes at competitive prices. Nike’s expansion into international sales was critical in helping pull the company out of a slump in the mid‑1980s and to reach $2 billion in revenues by the end of the decade. Rapidly increasing international revenues also contributed to an impressive growth rate during the 1990s, pushing revenues up from $2 billion to $9 billion over an eight-year period. International sales have fueled Nike’s expansion in the 2000s and helped it ring up $15 billion in sales for the year ended May 2006. Sales in every region outside the United States have enjoyed double-digit increases for several years.

Of course, operating globally also entails substantial responsibilities. Nike management, for example, must understand the cultural, political, and legal environments of the host countries in which it produces and sells its products, respecting not only minimum‑wage and other laws and environmental regulations, but customs and cultural values as well. As a good corporate citizen, Nike must also be a good taxpayer (for example, in fiscal year ended May 2004, the company paid almost $270 million in foreign taxes)3 .

Needless to say, Nike benefits the countries in which it does business, primarily by creating much‑needed jobs (contract factories currently employ more than 600,000 workers). Nike’s presence provides an influx of U.S. currency with which host countries can buy the imports, such as high-tech equipment, that are critical to economic and cultural development.

The Challenges of Global Growth

Producing and selling products in various countries throughout the world has presented Nike with a number of challenges. Let’s look more closely at some of the most significant.

The Global Economy   Selling products in foreign countries subjects Nike to risks associated with downturns in the global economy. Prior to 1998, for instance, Nike had every reason to be optimistic about its future in the Asia-Pacific region, where, buoyed by promising forecasts, it expected to grow substantially. Beginning in 1998, however, the economy of the region collapsed. Nike’s sales in the region fell by 19 percent, and before things bottomed out, the company had to lay off 15 percent of its Asian managers. Fortunately, sales have since returned to pre-1998 levels. In fact, Nike’s revenues in the Asia-Pacific region have increased by nearly 28 percent over the past three years (fiscal years 2004 to 2006), thanks in part to increased sales in China.4 Once again, the company is optimistic, but management today is being strategically more cautious.

Organizational Structure   Companies that go global are faced with a common dilemma regarding structure: Which decisions should be made at the corporate (home‑country) level and which at the host‑country level? As Nike expanded its overseas markets, top managers were determined to preserve a centralized corporate “philosophy” even while continuing to promote the entrepreneurial spirit that was among its hallmarks. They also knew the company’s current organizational structure wasn’t conducive to the kind of flexibility that it would need to respond to a burgeoning array of international challenges. They opted to restructure, maintaining centralized control by means of global standards set at the corporate level while encouraging local decision making by empowering operating units at the host‑country level.

Labor Practices   As a producer of athletic shoes and apparel in foreign countries, Nike is responsible for the workers who make its products and for the effects of its operations on the host‑country environment. As we saw in Chapter 3, Nike came under considerable criticism in the 1990s for labor practices in its foreign contract factories. Although some of the criticism was unfounded, the company acknowledges that many factories did employ underage workers, that air quality was poor in some facilities, and that some workers in others were subjected to potentially harmful conditions. The firm has since made substantial efforts to rectify these problems. It has increased the minimum age for workers in footwear factories to 18 and to 16 in apparel and equipment factories (the legal age is often about 14). Air quality has been improved, and factory owners are now required to use water-based glue, which is much safer than the previously used petroleum-based adhesive. All factories must adhere to a code of conduct established by Nike. Nike was able to escape from a public‑relations nightmare but the company must remain diligent in monitoring labor practices for which it has taken responsibility.

Thinking Globally, Acting Locally   As Nike’s sales expand globally, company management has come to realize that what works in the U.S. market doesn’t necessarily work elsewhere. It may seem like a pretty obvious point, but the revelation didn’t come automatically. Once upon a time, Nike tried to push its U.S. model in every market. Convinced that it would sell everywhere, Nike translated U.S. advertising into German and bombarded German consumers with it. So, too, in England and Singapore.

Unfortunately, Nike marketers were ignoring the relevance of local culture, and the strategy of putting different spins on the American model didn’t work (even the slogan “Just Do It” is offensive in some cultures). Today, Nike’s marketing is much more locally driven, featuring unique ads for Germany, for England, for Singapore, and so on. Nike managers now realize that while it’s okay to take a global view of things, a lot of images have to be translated and interpreted for local tastes.

A Look into the Future

Is there room for Nike to grow internationally? Many observers believe that the company has just begun to reach its global growth potential. Currently, the plan calls for staying strong in the United States while establishing a firmer grip in the areas where it’s just begun to gain a foothold. Nike is now selling in more countries (up from 120 in fiscal year 2004 to 160 in fiscal year 20065 ), expanding operations in such emerging markets as Eastern Europe, the Middle East, South America, and Asia, and strengthening its presence in many of its long-term markets. In many countries, Nike is not the top brand; in some, it’s actually number three or four. Thus one facet of its global strategy: to take over the top spot in these markets.

Production figures are for fiscal year 2006; Nike, Inc. 2006 Annual Report on Form 10-K, page 6.

Ibid, page 5.

Nike Corporate Responsibility Report, Fiscal Year 2004, page 5.

Nike, Inc. 2006 Annual Report on Form 10-K

Nike, Inc. 2004 Annual Report on Form 10-K, page 3; and. 2006 Annual Report on Form 10-K, page 3.

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