Introduction
Nike is a global leader in the shoe industry. Having created an image of excellence in the US, the company has become highly successful in other countries as well owing to its superior products and strong brand. In this report, it is assumed that Nike is contemplating a move into an emerging country-China. One must analyze the business environment, location, industry and major challenges that the organization will face when trying to achieve this.
Why the company should consider moving from the current location
Currently, the organization is headquartered in the US and has a very strong presence in other western countries. However, competition is growing immensely. Companies such as Adidas, Puma, and New Balance are getting as innovative as Nike. Recently, organizations such as Adidas and Reebok have merged to create a very strong force in the sports footwear industry. Product differentiation is no longer enough to give Nike that competitive edge. Furthermore, the threat of market saturation is a reality. Growth rates in the US and European markets have dwindled dramatically. It takes too much input from the organization to record even one percentage increase in sales within these mature markets. Consequently, Nike needs to look elsewhere to maintain its impressive sales records.
The company has diversified in various products and market segments. In the past, Nike was known for its high-end products. Therefore, it carved a niche amongst these types of consumers (Nike, 2011). The creation of low-end products may dilute the Nike brand and threaten their position in the market. Consumers can illustrate this through diminished customer loyalty to the brand.
A large multinational such as Nike is struggling to keep its record level performance especially in the wake of the 2008 economic recession. The US was hardest hit by this global phenomenon, so Nike must reorganize its market strategy in order to cushion itself against harsh economic conditions in one primary market. In fact, the company’s growth rates are yet to recover from the economic recession that started in 2008. Nike is a premium brand, and many others like it tend to be susceptible to economic and industry fluctuations. The company needs to look for strategies to neutralize these negative external forces.
Nike uses endorsements as one of its primary promotional strategies. It often selects promising athletes in almost all types of sports and uses them to endorse their products. The firm spends millions on endorsing even one candidate. Therefore, making many wrong moves has immense repercussions for the company’s profit margins. Recently, the company endorsed a controversial athlete-Tiger Woods.
It spent millions on the project, but after the latter individual got involved in a personal scandal, Nike could no longer associate its brand with Tiger, and this meant that the endorsement was a lost investment. It is difficult for Nike to predict how the selected athletes will behave. As a result, the organization must be ready for the risks associated with sponsorship deals. This means that marketing expenditures will always be high for the company. Nike must look for creative and sustainable ways of dealing with the situation through other avenues (Dogiamis & Vijayashanker, 2009).
As a recommendation, Nike must consider entry into an emerging economy such as China, Thailand, or Singapore in order to mitigate the current problems. These countries do not have saturated sports-shoes industries as the US does. Consequently, China can be a plausible option for Nike in the recent future. Nike should consider this move because it has the opportunity to become a leader in that market. It also has the potential to report increases in growth rates.
In summary, Nike stands to benefit from the following advantages if it chooses to move from its current location. It will build its shareholder and brand value. It will increase its revenue sources and would benefit from high growth rates. Furthermore, Nike will minimize its dependence on the home market. Additionally, it can leverage the supply chains, technologies and know-how of that economy. Countries in Asia are quite promising, with the most plausible being China (Stiglitz, 2010).
The business environment in the selected market
China is considered as one of the best destinations for foreign direct investment. In fact, over two hundred countries invest in China every year. Multinationals for Taiwan, Korea, Japan, and the US are all targeting this market. What’s more, over eighty percent of the organizations that are set up in this market happens to be profitable. This means that Nike would have very high chances of succeeding if it considered China as a new market. It would also benefit from government incentives designed to encourage foreign investment from multinationals such as the Chinese national development and reform commission’s directives.
Currently, China has the largest population in the world. Therefore, it is the largest geographical market in the world. The diversity and competitive intensity in this nation are simply unrivaled. Economic reformations that took part in China in the 1990s led to the creation of a new class of affluent buyers. In 2006, the country had about 236,000 millionaires. This implies that there will be a ready market for a premium brand like Nike in this country.
However, Nike must be aware of some of the challenges that may emanate from this region of the world. It is argued that because of the economic disparities between the urban rich and the rural poor, the country has one of the largest income disparities in the world. Immense bureaucracy, corruption, and infrastructural challenges could also be a problem for any transnational that is thinking about moving to China. Although the Chinese government is working on the problem, the country must struggle with those issues and deal with them gracefully.
This country cannot boast of having strong democratic frameworks owing to human rights violations as well as media censorship. These may be a setback for a transnational because one cannot count on the political leadership to spearhead reforms promptly and efficiently. Overly, however, one might say that the market has promising growth rates. Increasing expenditures have been recorded in China in urban areas as well as in rural areas. Nike must seize this promising market as soon as possible (Wrigley & Currah, 2006).
In order to secure the best deal, Nike must focus on the urban population rather than the entire geographical region. This is because the company is a high – end brand that has always dwelt on this segment of the population. Additionally, the firm must consider partnering with local companies. Prior to the 1990s, the country had a policy that required all multinationals to partner with locals in order to ascertain that profits remained in China.
In an effort to encourage more FDIs, the government abandoned this policy. Nonetheless, the tariff, taxation and legal procedures for multinationals that use joint ventures as a major approach tend to be friendlier and easier to handle. In order to ensure profitability, Nike needs to consider this option. China has trade agreements with countries in the ASEAN region; therefore, the US falls outside this bracket. Special agreements on certain products exist for exporting companies from the US. Nonetheless, Nike would enjoy more advantages if it focused on making the shoes in China rather than bringing them in. It would enjoy government subsidies for producing locally.
Nature of the competition
China is a highly competitive market with regard to the shoe industry. Statistics illustrate that the country is the largest shoe exporter. Additionally, shoe consumption in the country is approximately 200 million per year. However, specialty markets within the shoe industry are quite different. The market is yet to reach saturation rates for sports shoes, so this is good news for Nike.
Most consumers are price-sensitive in this area. Therefore, a number of them have not been exposed to high-quality brands in the sports footwear sector. In order to survive in such an emerging economy, Nike may need to start with a low pricing strategy. Later on, it may consider changing that approach to a high-end product after securing a strong customer base (Mitchell, 2011).
A number of other international firms already operate in China and they include Adidas and Li Ning. Li Ning produces locally but sells globally. In order to counter this firm’s strong competitive advantage, Nike should also produce locally and sell locally. Since the government has already increased export-oriented taxes, then it will be imperative to consider other types of investments that do not involve exportation. If Nike makes its products in the country and sells them there, Li Ning will not have an edge over it.
Nike’s major challenge of moving to this location is that the emerging market is still unexplored with regard to the sportswear shoes. Therefore, every other international company wants to enter the market as well. This means that Nike must offer a lucrative deal for consumers. In addition to this problem, the market in China is not as sophisticated as it is in the United States.
A vast number of consumers in the Chinese market are still looking for basic qualities. Many clients will be satisfied with a basic level of product quality. If Nike exceeds these expectations, it may not get the same positive responses that it gets in Europe and the US. On the flip side, it will not be capital intensive to produce sports shoes for consumers in the Chinese market because many of them may not require sophisticated or high-tech products (Dawar et al., 2004).
Adidas and other international competitors have a strong brand image in this country. However, Nike can outrank them by using a multi-thronged approach. It can continue with endorsing athletes in the Chinese market. It may also sponsor events and rely on other conventional promotional targets such as banners, billboards and television advertisements. Therefore, the company needs to have a major branding strategy in the country. Owing to the need to educate consumers about sports shoe features, consumers have great buying power. Nike will need to enlighten them about foot compatibility, comfort and other great benefits that they can enjoy from using their shoes.
Nike will also need to deal with distributional challenges. Currently, retailers and distributors are working with local suppliers who they know and trust. Nike will need to convince these retailers to leave their suppliers and partner with them. It will take a lot of time and resources to initiate this move. Additionally, local competitors like Li Ning already understand the market. They do not need to do research about the culture in the country and this means that their expenditures are quite low. Some of them can offer competitive prices that Nike cannot. Nonetheless, this transnational should have a long term approach to China. After educating and promoting its firm, then Nike could record the same success in this emerging market (Rondinelli & London, 2003).
Main challenges
As explained in the latter section, the major difficulty in the competitive landscape for sports shoes is dealing with local competitors. These firms already have a niche in the market. Consumers associate each enterprise with a particular image. Nike must also create a certain image in the minds of these consumers that will make them exceptional.
The business climate is also challenging with regard to nontariff and tariff barriers. The Chinese government is highly selective about particular industries, such as medical devices and IT related products. It offers incentives in these industries, but not in mass-market commodities such as sports shoes. This may be an impediment to Nike especially when it invests heavily in technologies that are designed to boost sales. Accounting regulations and tax rules are a serious barrier to trade in China.
The country has complicated taxation policies that can only be understood after years of experience in the country. It will be difficult to predict these expenses and hence take control of them before they spiral out of control. Reports indicate that enforcement of the rule of law is quite haphazard in this country. Nike will find it difficult to get legal redress in case of any complications. This will be particularly frustrating because the company has grown accustomed to the strong law enforcement agencies in its headquarters and chief markets. Corruption and administration difficulties are also prevalent in the country and may diminish Nike’s rightful returns.
One of the obvious challenges for an English-speaking transnational is the language and culture of the target market. Headquarter representatives may have communication difficulties with the locals. Additionally, the company may find it difficult to locate the right business partner who understands the local market, is successful in the sports apparel, understands the shoe industry and speaks English well. Some cultural barriers may also interfere with operations. For example, many Chinese citizens believe in informal approaches to business and dwell on long term relationships. The high level of distrust for foreigners may impede Nike’s penetration capabilities in this market. Furthermore, respect for hierarchy may minimize the firm’s human resource capabilities as high achievers would not receive much appreciation for their input (Frost, 2010).
Logistical difficulties are a serious reality in China. Nike is dealing with a tangible product that requires a rigorous transportation system. It will need to deal with bottlenecks in moving their goods from factories to distributors and retailers; this may hamper their progress. Additionally, because China is still developing, it still faces utility challenges. Nike may need to invest in back-up generators and independent utility supplies in order to prevent operational disruption. It may also have a difficult time getting quality staff.
In order to mitigate these risks, Nike must look for a local partner that understands its industry. It must invest a lot of time and resources in identifying this entity because it could make the difference between success and failure for the organization. The firm must do due diligence and should be flexible in case of problems that occur. It must also anticipate these challenges; such as transportation and energy, and then counter them by having a backup plan. It must also foster two-way communication between the local partner and the company headquarters.
Performance reviews will also ascertain that it does not fall prey to under-delivery. Nike can deal with the problem of local competition by using aggressive marketing techniques. It can use its international brand and experience to stand out. It needs to stay ahead of the local competition through the innovation game. Additionally, Nike should produce locally in order to avoid the tariff barriers that emanate from imported commodities. As explained earlier, the government supports more exports than imports (Johnson & Turner, 2003).
Entry strategy
A joint venture will be the best approach in this market. This is the most widespread approach for organizations in the manufacturing sector and among those ones that sell consumer products. This approach will be useful to Nike because it will access the Chinese domestic market while at the same time maintain control of its operations there. Furthermore, a joint venture will allow Nike to seize the low labor costs in their country and the well-educated employees in the country (Anderson et al., 2002).
Nike will also benefit from tax exemption and can get financial support from local banks and other financial institutions. It will also overcome challenges in foreign exchange controls that challenge many foreign-owned businesses in China. Nike would also have a high chance of getting a local partner because the organizations would be interested in getting advanced technology from Nike, heightening their access to international markets, and improving their own market share in the Chinese market. The joint venture will provide a win-win situation for Nike and the local partner.
Many Chinese negotiators regard joint venturing as a lengthy process. They do not reveal all their intentions at the first meet and may not be as open as their US counterparts. Additionally, this lengthy stretch may cost Nike a lot of money. Nonetheless, some joint venture negotiations have lasted for short periods of time, such as three months. Nike will need to employ the strategies used by the latter category of firms rather than the former.
China has several economic zones that benefit from land use clauses as well as tax benefits. They also have special entitlements with regard to raw materials and different economic considerations. These areas include Tianjin, Shanghai, and Pudong. Not all investors may prefer these locations. The government needs to expand into other areas so as to offer foreign investors more options. It should also work on infrastructure capabilities and utility issues.
These are major impediments to foreign partnerships as will be the case with Nike. Joint ventures and investments are highly regulated by the Chinese government. It often designs which products will be imported and which ones will get approval easily. The government needs to reduce its participation in this regard because project approval takes quite a long time. It also needs to streamline the process of making joint ventures.
Some components of joint ventures have not yet been fully addressed by the Chinese government. Things like liquidation and termination are not in the country’s policy systems. Since tax incentives for joint ventures are dependent on the location and the type of project under consideration, it should take the time to neutralize these kinds of challenges.
Conclusion
China, as a target market, offers a lot of promise to Nike. It has immense prospects for growth and is a large consumer market. It is also a leading investment destination. On the other hand, infrastructural challenges, corruption, and complicated taxation systems can create problems for foreign investors. To mitigate these risks, Nike should use a joint venture strategy, select the right partner and take advantage of its strong brand image.
References
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Dogiamis, G. & Vijayashanker, N. (2009). Adidas: Sprinting ahead of Nike. Web.
Frost, T. (2010). The geographic sources of foreign subsidiaries. Strategic management innovation, 22(2), 101-123.
Johnson, K. & Turner, F. (2003). International Business: themes and issues in the modern global economy. London, Routledge.
Mitchell, T. (2011). China’s shoe industry under pressure. Financial Times, 25 February 2011, 55.
Nike (2011). Official company website. Web.
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Stiglitz, J. (2010). Globalisation and its discontents. NY, Norton and Company.
Wrigley, T. & Currah, P. (2006). Transnational retail in emerging markets. Paper presented and the 100th Annual conferment of Association of American Geographers, PA, 18th March.