Nike has managed to not only remain the number one player in the market for athletic wear and footwear but to increase their leadership in the category. They are now at a point where they are competing against themselves in an attempt to “lap” their competitors. Nike is the number two brand for millennials, only trailing Apple1. In 2013, they had twice the market capitalization of their nearest competitor, Adidas. Within two years, Nike has grown that gap to six times Adidas’ market capitalization. There is no end to the aggressive targets, as evidenced by the 2020 revenue goal of 50 Billion USD recently announced by Nike CEO Mark Parker3.
Nike designs and sells both apparel and footwear. They sell through two channels: wholesale to distributors with retail stores, and direct to consumer through their company-owned stores and website. In order to gain credibility and brand recognition, Nike invests heavily in the sponsorship of top athletes. They position themselves at the cutting edge of product technology to justify high retail prices. In order to meet the aggressive goals outlined in their 2020 strategy, Nike is putting an emphasis on high growth in the direct consumer business, driven by growth in online sales. They are also focused on expanding the gross margin through cost reduction in manufacturing4.
Nike’s operating model is focused on a process that includes design, manufacturing and sale. They invest heavily in the R&D and design processes, and their CEO is known to sit in on junior design meetings lending his “great eye for product”5. Nike has both an “Innovation Kitchen” and the Nike Sports Research Lab which are focused exclusively on creating new product and service technologies. Purposefully absent from Nike’s manufacturing process, are any company-owned factories. All of the manufacturing is outsourced and diversified, consisting of more than 700 factories in 42 countries. In addition, most materials are sourced in the same country as the factory producing that component. This allows Nike to create extreme cost efficiencies and piece together the most profitable product from components all around the world6.
Nike’s business and operating model are aligned to drive towards it’s current strategy. There are three main areas where alignment can be seen. All areas link together to provide a cohesive strategy:
1. Low Manufacturing Costs, Equal High Gross Margins, Leaving Room for High R&D Spend
The ability to create a product at the lowest possible cost, by taking advantage of specialties in local markets is something unique to the size and scale of a business like Nike. While, I would be remiss if I didn’t mention Nike’s criticism for its labor practices, this goes beyond cheap labor. It is about a sophisticated sourcing function that knows where it is cheapest to source the leather of an upper, the rubber for a sole, and where it is cheapest to put it all together. All of this while taking into account transportation costs, and considerations such as speed to market for a product. This cost reduction expands gross margin and leaves room for R&D investment.
2. Investing in R&D and Innovation Justifies High Price and Retains Market Leadership
Nike’s investment in R&D touches all aspects of it’s business. R&D is done with the help of sponsored athletes who provide a unique view into the specific requirements of the sport at their level. These athletes then become product evangelist and are seen exceling in every sport draped in the Nike swoosh. This instant credibility then has an effect on the market. Nike is perceived as a leader at the cutting edge of athletic technology. The perceive leadership leads to the market’s willingness to pay a premium for their products.
3. Direct to Consumer Business Grows Through Innovation and Manufacturing
Tying together both the manufacturing and the investments in innovation, is the key to Nike’s growth in it’s Direct to Consumer segment. Nike’s investment in innovation doesn’t only yield new products, but also new ways of delivering those products. NIKEiD is a prime example. Through NIKEiD a customer can take an existing Nike product and customize it with their own fabric and color options. Again, this
allows Nike to command a higher price. More importantly, it outsources some of the design to customers providing them the exact shoe they want, only available direct from Nike. This customization is enabled by the flexible and sophisticated manufacturing system that Nike has set up.