Nike Case study

                Nike Case Study

The case study focuses on Nike's history. Since its creation in the early seventies, Nike suffered severe critics on various behaviors related to its business model based on the use of foreign, merely Asian, suppliers of its end products, designed, promoted and sold merely in the US and Europe. As exposed, Nike's history can be divided in 3 major periods of change in order for the company not to lose Market Shares, these eras of change in strategy being:

1) Accepting to influence its suppliers to offer acceptable wages to their employees,

2) Moving away from socially unacceptable working conditions,

3) Defending Children's rights.

But before addressing these 3 periods, first some feedback on Nike's history and desire of creating a new competitor in the Sportswear Market dominated by Adidas and Reebok.

Building a Worldwide Competitor in the Sportwear Market

Since its creation in 1971, Nike decided to become the leader on the sneakers and sport market, in the 1990s the company became one of the world’s best known brands. Nike CEO, Phil Knight, significantly overwhelmed the market with a simple business plan which he had imagined in 1962. It consisted in reducing all the costs by outsourcing all manufacturing and thus creating the first “virtual” corporation. The money saved on the production line will be available cash for marketing merely based on celebrity endorsements, such as Michael Jordan. As Nike products were made by independent contracting factories, the headquarter toke charge of negotiating with these subcontractors, managing the relationship with and between providers deciding on design and identifying and implementing new ideas. However, several Nike suppliers were charged of not respecting human rights and ethical policies which generated several controversies on the reputation and social behavior of the firm.

Nike changing its Strategy on wages ?

The main critics received by Nike were related to wages offered by its subcontractors.

In the seventies, Nike merely contracted Japanese manufacturers. Starting in 1982, the company progressively switched to South Korean and Taiwan industries, always focusing on the low cost and trustworthy production. As these countries became richer and as life standards and wages raised, the costs increase pushed Nike to relocate its production to China and Indonesia. Some figures to underline this phenomenon: In Japan, the yearly minimum wage increased from $3,920 in the early eighties to $8,327 in 1990. In the early nineties, Indonesian wages only represented an average $241.^[1] At that stage of its development, Nike preferred a quantitative approach rather than qualitative, accepting the added-value being less important for Indonesian workers. But Nike was criticized on the fact that the salaries of its Indonesians workers did not cover their basic needs. Actually, only single workers earning the minimum wage earned a decent living. Moreover, the difference between the cost of labor per product and its selling price was judged far too important. In 1990, the labor cost of a Nike Shoe only represented $3,37 while its retail price reached an average $90.

Phil Knight, Nike’s CEO, justified himself by stating that subcontractors are considered fully independent and authorized to fix the wage they consider appropriate. The wages correspond to each countries’ labor situation and can not be controlled by Nike nor any other company. Moreover, salaries in Indonesia or China should not be compared to American standards because the living conditions were also very different. No rule exists constraining American Firms to pay their non-American workers at the same price as Americans. Just like its competitors, Nike considered acceptable to deal with its subcontractors abroad in this manner. Nike’s strategy raised considerable disapproval. Facing numerous critics on unacceptable low wages of its subcontractors. However, Nike decided to ignore critics. Instead, Phil Knight launched an important control plan in its suppliers’ industries to insure the respect of low local wages, which merely showed several manufactures indeed did not offer morally defendable wages.

Yet the company could have reacted by admitting its mistakes and presenting an action plan to reestablish socially acceptable working conditions for its subcontractors as soon as critics started to impact its image. Moreover, Nike could have changed its way of acting by inciting its suppliers to increase workers’ wages in order to meet their needs, even considering decrease its margin, thus proving its will to become a “socially and morally responsible firm”. Based on the theory of "efficient salaries", Nike could have improved its productivity per employee, because fairly paid employees are motivated to raise their contribution quotas.  

Nike modifying its Strategy on Suppliers' Working conditions and Salaries!

To underline the worldwide impact of this affair, businesses practicing extremely low wages, miserable labor conditions, insecure workspaces and inhumane living conditions are nowadays qualified as “Nike sweatshops”. Asian workers were pushed to achieving unrealistic production quotas without appropriate return on effort. For example, more than 10,000 Indonesian women worked over 60 hours a week in a Nike supplier industry and were paid less than the Indonesia’s minimum wage of $1,80 a day.^[2] How could this be? Illegal behavior protected by generalized corruption in Indonesia open the way to disrespect of the legislation and the labor laws and therefore offers no protection to an abuse seeking profit above all. Management behavior and working conditions also suffered several critics. Women in Indonesia were allowed to leave their working plant on Sundays but only with a permission letter of their manager. Ernst & Young, a well-known international audit company, reported to Nike Management denouncing dangerous working conditions. Health and safety issues were highlighted, the premises were unsanitary, as the equipment which induced several illnesses like respiratory ailment caused by the ventilation system and the presence of chemicals products in the workspace. Their report, that leaked out in public, also explained that some workers were forced to work 15 hours more than allowed by the countries law.

...