!

Memorandum #3

Collin J. Myers BUS-458

Spring 2013

Collin J. Myers

II

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

1 http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 2 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

Administrative expenses (SG&A), which would affect NIKE’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 long-

term 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.

“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.” 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,

7 http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 8 http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w20vs9.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-global-manufacturing-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

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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 performance-

tracking 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

14 http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w20vs9.pdf 15 http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w20vs9.pdf 16 http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w20vs9.pdf 17 http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w20vs9.pdf 18 http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w20vs9.pdf 19 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future

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

NIKE’s digital division is not only about creating must have gadgets; it is also an

opportunity for NIKE to analyze consumers’ 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

world’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 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future 21 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future 22 http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w20vs9.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 http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w20vs9.pdf

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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.

“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 we’ll be investing accordingly to capture that potential in product, brand and e-commerce” 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

26 http://management.fortune.cnn.com/2012/02/13/nike-digital-marketing/ 27 http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w20vs9.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

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

32 http://www.fastcompany.com/3005528/most-innovative-companies-mark-parker-nikes-digital-future 33 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

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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

38 NIKE FY2012 Annual Report, “Mark Parker Letter” 39 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 41http://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

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.

46 http://www.nikeresponsibility.com/report/content/chapter/our-sustainability-strategy 47 http://www.hurley.com/blog/blog.cfm/aid/49344/4X-SIMA-BOARDSHORT-OF-THE-YEAR

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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’

48 http://www.nikeresponsibility.com/report/content/chapter/business-overview 49 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-flat-organizational-structure.html#ixzz2K0HbaH95 54 http://www.nikeresponsibility.com/report/content/chapter/our-sustainability-strategy

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.

55 http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w20vs9.pdf

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Figure 156

56 http://management.fortune.cnn.com/2012/02/13/nike-digital-marketing/

Figure 257

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

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Figure 358

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

Figure 459

59 http://www.nikeresponsibility.com/report/content/chapter/our-sustainability-strategy

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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 10-K”.http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf Nike, Inc., Strategy, “Our Sustainability Strategy”.http://www.nikeresponsibility.com/report/content/chapter/our-sustainability-strategy Dwight Chestnut, NIke’s Flat Organizational Structure.Nike's Flat Organizational Structure | eHow.com http://www.ehow.com/facts_6887850_nike_s-flat-organizational-structure.html#ixzz2K0HbaH95 NIKE, Inc.Management. http://investors.nikeinc.com/Investors/Corporate-Governance/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-OF-THE-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-strategy-reshapes-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-innovative-companies-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/