I, Applying Porter Model to explain why Nike manufactured in Asia.

Michael Porter, 1985 introduced value chain which provides a process of activities within

an organisation. Porter classified value chain into two main groups: supported activities and

primary activities. (See appendix)

Primary activities directly contribute to business’s production or service. One of its main part,

inbound logistics are the keeping of raw materials and their distribution to manufacturing when

necessary. When Nike operated in Asia, the inbound logistics could be enhanced by minimizing

shipping costs to store and reducing the response time. Whilst there were few resources available

in US during that time, the industries of textile and tanneries are plentiful in Asia. Apart from

that, Nike outbound logistic activities were much concerned by the increase of subcontractor

factories in more countries. It makes the distribution of products are easier and cheaper.

The supported activities linked to business infrastructure, human resource management,

technology development and procurement. Before starting to do the business in Asia, Nike found

some shoes factories in Taiwanese and South Korea with wealthy families. Once the new

manufacturing was opened here, they will bring new managerial expertise with high production

technology and design. Therefore, the technology development activity of Nike would be

extremely developed from these countries. By using potential sources of materials in Asia, Nike

will get benefits in procurement activities. For example, they could bring these materials as soon

as possible for “Just- In- Time” strategy to avoid redundancy of stocks in hand and shipping to

wholesalers whenever they need. Moreover, the labour wages in developing countries like Asia

often lower than others. Daily wage per worker in Indonesia is around 1$ per days in 1990s. It

seems that the human resource management is much easier in these countries with low debate of

money or higher position. In short, Nike resources remained unlimitedly and potentially so

Knight made a decision to expand the firm’s market to Asia in the late 1990s.

In next part of report, five-force framework will be applied to Nike case in order to find out its

opportunities and threats from the period from 1990 to 2000.

1b. Five force framework analysis

Porter, 1980 introduced the five key aspects to set the position of organization in its

environment as below:

Threat of new entrants: It creates a barrier for existing term within the industry. The footwear

market requires a huge working capital for various activities. Since 1992, Nike was considered as

one of strongest brands over the world. The approval of difficulty market and Nike- strong brand

had led to weak threat of new entrants. Thus, Nike could benefit from price- effectiveness,

human resource advantages and customer loyalty. When the inflation has increased or activities

cost rise, Nike could increase its selling price without fear of losing loyalty customers. In

addition, the human resource capability and skills of workers could be closer to firm whilst there

is less business within the market.

The bargaining power of buyer: It’s how customers bargain business activities. Nike’s annual

revenue reached $2 billion in 1990s and closed to nearly 7 billions 7 years later.(

www.fundinguniverse.com) The figure illustrates a great amount of customers at that point.

According to Nike’s historical price look up, average closing price was 3.34$ in the beginning to

1990, rapidly increased to 24.75$ in 2000. Customers are sensitive to pricing so they always

compare selling price with product’s quality and service. Bargaining power of customer is,

therefore, high. It may be sometimes threaten Nike in facing up with customer’s compliance

about quality of apparels, selling prices, after- sales service or business activities towards society.

For example, the story in Life magazine newspaper, which criticized the use of child labour in

Pakistan, might affect to customer’s buying behavior.

The threats of substitute products: The pressure from substitute products depend on 3 main

factors: price of substitutes, quality or performance of substitute products and customer’s

whether buyers can switch into substitute products easily ( Strategic management, concept&

cases, thommpson). In case of Nike, there are little alternative products for footwear so threat of

substitutions is quite low. Not only it was a strong brand with high quality, but also Nike was

succeeding in updating new design. Thus, Nike was attracted by most of customers. The weak

threats of substitute products bring Nike some opportunities such as expanding the market and

increasing demand for innovative products.

Bargaining power of suppliers: Since 1990s, Nike started to open new manufactures in Asia.

Thus, they had a new opportunity of accessing new materials. The resources of material in these

countries seemed potential at that point. Therefore, the organization has many choices to assess

into essential materials. For example, the total value exported textile in Thailand during 1990s is

3.513 bil USD (sources: USDA/FAS,). Thus, the bargaining power of Nike supplier is low

during period of 1990s and 2000. It will reduce the cost of raw materials and also deliver price

from these suppliers. As a result, the business profit could be maximization.

Competitive rivalry: From 1990 to 2000, the two biggest competitors of Nike are Rebook and

Adidas. The figure below shows worldwide market share of footwear industry from 1990 to

1999:

(sources: http://cbae.nmsu.edu)

Nike dominated the market from early 1990 with total market share is much higher that

its biggest competitors. However, Adidas and Rebook developed their brand and increase its

sales rapidly during the decade (http://www.adidas-group.com). Therefore, the rivalry among

existing competitors of Nike was medium. They could face up with some threats and also

opportunities. The domination of footwear market supported Nike to open the market, intensive

innovation and new products development. In contrast, the existing firms could create some

pressure in market share competition and initial innovation.

Nike’s benefits from international trade will be then taken into account on purpose of allowing

company find out their suitable strategies in global market.

1c. International trade benefits.

Firstly, when Nike goes global, they will gain benefits from cost of products. This cost-

effectiveness includes cost of labour, materials and transferring. For example, when Nike open

new manufactures in Indonesia, they saved 7$ per worker per day compared to US ones (Case

research Journal, Anne T.Lawrence and Rebecca Morris, 2001). They also could easily access to

materials in new land when the market is opened. Secondly, international trade enhances the

relationship between company and customers, keep it closer and adapt faster to change. The

development of customer service centers quality and quantity will maintain a strong connection

between firm and their customers. Thirdly, the multiple production sites would support Nike to

get tax exemptions and trade barrier avoidance from host countries. For example, foreign

companies are exempted from Value Added Tax and Corporation Income Tax in Vietnam for 2

years from the beginning year of business (http://wiki.ibom.com.vn). The complex organizational

procedures to open new manufacture will be also minimized. Lastly, the competition with other

companies could improve the development of Nike’s production technology and working

processes. Every country has its own feature and advantage so it’s profitability when Nike goes

globally. In Japan, the technology system is well developed so the technology products are good

quality here. Nike could apply this modern system in their machines or computer systems. The

advantages above had contributed to a huge market share of Nike in global.

After searching for Nike’s external and internal environment, it seems easier to apply

Whittington’s perspectives on strategy.

2a. Whittington’s “Systemic” and “Processual” Schools of Thought.

Strategic management is becoming more important for business construction. Especially,

the changing in business environment could threat to organisation’s stability. Whittington (2000)

introduced four approaches to strategy which are classical approach, systemic approach,

evolutionary approach and processual approach. Whilst planning are made through market

changes adaptability in classical school, strategies must be updated daily to survive in

unpredictable market in evolutionary school. Different from the two approaches, Whittington,

2000 mentioned: “ Processualist emphasis the sticky imperfect nature of all human life,

pragmatically accommodating strategy to the fallible processes of both organizations and

markets. Systemic approach is relativistic, regarding the ends and means of strategy as

inescapably linked to the cultures and powers of the local social systems in which it takes place”

Whittington noted that the main principle of “processual” is to accept unattainable ideal

of rational fluid action and work with it. The Approach was laid by American Carnegie School.

It focused on the complexity within an organization. Under this school, the micro- political view

implies that firms not only made up of its single goals, but also different individual’s interests

when they joint business goals together as pluralism. When more than one view point involved in

strategic, conflicts occurred and solutions must be recommended. For example, in healthy sector,

the professional in different group had their own issues on preventing the human diseases, all

have different wishes to support their ideas might lead to crisis in healthy improvement. Stacy

(1996) recommended the integrated model of decision making and control which deals with

dynamic troubles within an organization and base on degree of certainty or agreement on the

issue. The dynamic ranged from “technically rational” which issues seemed to be high level of

certainty and agreement. In different ways, “political decision making” considered the desirable

issues are close to certainty but far from agreement. In contrast, “judgmental decision making”

shows high level of agreement but low certainty of outcomes. The furthest point is the edge of

chaos, management approaches seems ineffective. In short, the Processual approach focuses on

internal politics with the key processes are bargaining and influences on psychology.

The Systemic approach gives a strong idea about the business’s interdependence on its

social to carry out their plans and action effectively. The firms are different from the others,

according to their social and economic systems. As whitley, 1991 mentioned: “Different kinds of

enterprise structures become feasible and successful in particular social context, especially

where culture are homogeneous and share strong boundaries with nation states”. The Viable

System Model (VSM), Stafford Beer is an improvement of organization which based on system

thinking. According to Stafford Beer, VSM was used as a conceptual tool to understand the

organization and support it to change. It consists of five key systems for an effective operation

which are Implementation, Co-ordination, Control, Intelligence and Policy. Nowadays,

organization should not use the ordinary systems which carry out daily problem solving to fit

with business objectives. Stacy (1996) shows another aspect of strategy management which is

extraordinary system- an understanding of business context, not just learning for better.

According to Boisot(1995), the systemic perspective must be both “codification” and “diffusion”

to make explicit and spread communication. Therefore, each subsystem of the business could

adapt its requirement from both internal and external.

2b: Selecting best perspective to Nike, from 1990 to 2000.

In order to select the best relevant to Nike, it seems essential to figure out shortly some

main differences between systemic and processual school of thought which were identified by

Whittington. Whilst the processual school sees the market as irrationality, systematic one is

totally different. “Processual” sees strategy as “crafted” which will be used in only emerging

situation. In contrast, “systemic” are often “embedded” within the social system. Apart from that,

processual approach concerns the political or cognitions bargaining process while systemic focus

on external or societies such as its competitors.

From 1990 to 2000, Nike had faced with various criticisms from public. In 1990,

Harper’s Margazine published that Nike just paid woman under 14 cents per hour whilst

product’s price was extremely high. In 1995, according to Washington Post, they had to deal

with problems between stakeholders: retailers, subcontractors, consumers and shareholders.

While a pair of Nike shoes was cost $70, labour cost and Nike profit were only $2.75 and $6.25

per one. The conflicts of profits held a dispute on interest sharing between stakeholders. During

the period, a story in Life magazine also criticized the use of child labour in Pakistan

subcontractor. It was not the end of public criticism, in 1996, CBS News 48 hours stated a

problem of working condition in Vietnam with low wage rates and physical abuse of workers.

The above evidence generated that Nike’s strategies were not sociologically sensitive. In

systemic approach, strategies will be developed in complexity and culturally networks. In

addition, the relationships in social structure at the system-level were not defined. Their

strategies were not long- term strategies, just acted in emerge. Therefore, processual approach is

best relevant and could be applied to Nike at this point. The perspective deals with politics or

internal conflicts within organization. In 1995, the public criticism showed a extremely situation

of conflict between Nike’s stakeholders. Customers wished to pay lower cost of shoes whilst

shareholders liked higher dividend. After all problems, Nike had to deal with change emergently.

That was the reason why they first introduced their “Code of Conduct” in 1992. Following this,

their subcontractors and suppliers must follow the local government labour regulations and

environmental policies. It seemed close to certainty and agreement, however, their coordinator in

Indonesia complained a lot on the new policy. The decision making is nearly close to Stacy’s

problem on decision making and control on the impact of pluralism. Stacy considered this

decision is “political decision making and control”. Reconsidering the coordinator’s complaint,

Nike hired “Ernst & Young” accounting firm in 1994 to audit their factories in Thailand and

Vietnam. Therefore, they made an important change in reducing toxic, harmful chemicals.

personnel training about health& safety in the workplace. This decision of Nike made its strategy

at high level certainty and agreement. In other words, they had made a technical rational decision

making, according to Stacy’s decision making identify.

In short, “ processual” school of thought is most relevant to Nike in the period from 1990

to 2000. Nike just set emerge strategies without focusing on long term ones. Therefore, they

must create some political compromises to deal with the conflicts. Two schools of thought,

Mintzberg will be then analyzed to make a comparison.

3a. Mintzberg “cultural” and “environmental” schools of thought.

Henry Mintzberg had arranged strategy approaches into ten school of thoughts, each had

its own strategy characteristic toward organization. Two of these schools: “cultural” school and

“environmental” school are going to be taken into consideration. The main features of each

school will be introduced firstly before going on their differences and similarities.

Nowadays, culture within a business is necessary to preserve its own power and imagine.

It groups individuals effectively into an organization. Mintzberg considered organizational

culture as key resource of competitive advantage. It also affects to business changes in decision

making style or dominating the value of service, quality, and innovation and so on.

Environmental school, on the other hand, Mintzberg, 1998 noticed that “Environmental school

first grew out of so-called: contingency theory, which described the relationships between

particular dimensions of the environment and specific attributes of the organization”. It means

that, in contingency view, environmental reacts to the determinant of strategy formulation.

In spite of different features, some similarities between them could be considered. Both of

schools are more concerned with certain aspects in the strategy management process. It

encourages more experimentation and innovation within the business. In cultural school,

business culture is put at the center to encourage key value, service, quality or intellectual

production. Moreover, the environmental changes will lead to business changes of strategy; bring

to company more experiment and new perceptions. In addition, the two schools are vagueness,

tends to describe what it is more than how to make a decision. However, they contributed a lot

to other schools and the business to attain its goals in the long term.

Mintzberg had summarized some main differences between two schools in his book, Strategy

Safari about their base disciplines, champions, leadership, and so on. Whilst base discipline of

cultural school is anthropology, biology is considered in environmental school. The point of

anthropology sees culture everywhere around people: the way individuals communicate or react

to others. In the population Ecology View, Freeman, 1997, the debate about capability and

supply of resource decided the survival of an organization. Base on cultural, people tends to be

social, spiritual, and collectiveness. Mintzberg noticed a story in US automobile industry, Whilst

Americans and European tried to compete with the other by re-inventing and imitating, Japanese

did the difference. They created their own way of producing automobile which is much suitable

with their culture. In contrastthe winner of environmental school is population ecologists or

organization theorists who take a great power to political or environmental factors. Moreover,

culture had been considered as root of an organization. A big company had been successful for a

long time based on its own culture. Therefore, it seems difficult to change their style. Unlikely,

the environmental school depend too much power on the external environment, the organizations

always capitulated with problems rather than facing with it.

3b: Apply the best “school of thought” to Nike between year 1996 and 2000 in term of strategy

development:

By expanding the sub- contractor network to new areas like Vietnam, Insonesia, Thailand

and so on, it seems that they could not control all of manufactures. According to the four

dimensions of environment, Mintzberg, they are now entering period of “market diversity”. The

market had ranged from integrated to diversified, led to some critical problems of business. In

1996, they were criticized for the working condition in Vietnam. In 1998, Nike had react its

environment criticism by reducing exposure to toxics, substituting less harmful chemicals or

installing ventilation systems in this country.

According to Rebecca J.Morris and Anne T.Lawrence in their Case Research Journal, Nike had

wished to participate in the Apparel Industry Partnership with the main aim of breaking with the

University of Oregon, building its own culture. That’s the reason why organization joined White

House Apparel Industry Partnership on Workplace Standard (AIP) which established by

President Clinton. Its participants are Nike, Rebok, Liz Claiborne, labour Unions, retailers,

wholesalers, and department store Unions. The participation of Nike and other memberships in

AIP could be considered as a process of “culture clash”, where different culture joined together

to encourage their unique culture. The made an agreement on “Workplace code of conduct” to

improve human working condition. Knight, president of firm stated that: “Nike agreed to

participate in this group because it was the first credible attempt, by a diverse group of interest,

to address the important issue of improving factory worldwide…but equally important, we are

finalling providing customers some guidance to counter all of the misinformation that has

surrounded this issue for far too long” The speech of Knight was seen as an emergent solution to

show customers their unique culture and the ability to evaluate it. However, in July 1998, New

York Times showed a problem in worker’s rights to organize their independent union. Nike and

other eight members established a new organization, called “Fair Labour Association (FLA)” to

deal with Workplace Code of Conduct. Many parties had benefited from association. Company

could reserve their brand imagine, university could bring their students a belief that the creation

of their apparel logo is produced under condition of FLA. Conforming to Kogut and Zander

(1996), "Social community….become a moral order of people bounded by what they know and

by what they value. This is rich culture, and it is what causes people to invent the brands that

serve the organization well”. Therefore, all the FLA members, including Nike was doing well to

create their “rich culture”. Unexpectedly some parties did not agree with that and create the new

one: “Worker Right Consortium” which provide minimum standards for working conditions in

factories. However, Knight disagreed with the association because he believed that WRC was

misguided, it’s unable to setting standard or monitoring rules. The president wanted to ensure

that only FLA should be kept going, as one main part to support Nike’s culture.

From the analysis above, it seems that cultural school of thought is best matched to Nike from

1996 to 2000. They set strategies based on their own culture, by joining AIP and FLA. These

associations bring Nike a good imagine in customers and other stakeholders’ view.