Nike 2002

Jill Austin: Middle Tennessee State University

Forest David: Mississippi State University

A.

Case Abstract
Nike is a comprehensive business policy and strategic management case that includes the
companys year-end 2001 financial statements, competitor information and more. The
case time setting is the year 2002. Sufficient internal and external data are provided to
enable students to evaluate current strategies and recommend a three-year strategic plan
for the company. Headquartered in Beaverton, Oregon, Nikes common stock is publicly
traded on the New York Stock Exchange under the ticker symbol NKE.
With 22,700 employees, Nike designs, develops and markets high quality footwear,
apparel, equipment, and accessory products. For fiscal year ended May 31, 2002, revenues
rose 4% to $9.89 billion. Net income increased 13% to $668.3 million. Revenues reflect
an increase in apparel, equipment and footwear sales in the U.S. and Europe.
Headed by CEO Phil Knight, Nikes poor sales of high-end "marquee" shoes from
Nike Inc. during the first quarter of 2002 prompted Foot Locker Inc. to reduce its
inventory of expensive shoes made by the footwear giant. The athletic footwear retailer
has sharply cut its inventory of shoes priced at over $120 since May to make way for more
affordable and saleable products. Classic or old style tennis shoes are coming back in
style. Justifying the company's move, Foot Locker chief executive officer Matthew Serra
said, "I think in the first quarter 2002 we went too heavy into the high-end, and it hurt us"
Nike, which regards the retailer as its biggest customer, said it was "a little disappointed"
with Foot Locker's decision. Students need to develop a three-year strategic plan for
CEO Knight.
A major issue in this case is the importance of marketing to athletic shoe
companies. Since most of these companies contract with foreign manufacturers to make
their products, marketing is the primary focus for the companies. Nike concentrates on
superior technology and markets its products stressing the importance of technology for
healthy exercise. Reebok's shoes are designed to make a fashion statement and marketing
efforts focus on "freedom of expression." Most athletic shoe companies rely on sports
stars to promote their products. As of mid-2002, classic, old-style athletic shoes are
becoming very popular and Nike is somewhat behind competitors in providing these
products.
Social changes also have a significant impact on this industry. People are changing
their lifestyles and are becoming more fitness conscious. The population is aging, as more
citizens live well into their 80s. Baby boomers, currently in the 44-54 age group, are the
largest wage-earning group among consumers. More young girls are involved in sports

209

than ever before (approximately 1 in 3). All of these factors affect the decisions made by
managers of athletic shoe companies.
Social responsibility is another issue in the case. Issues such as the waste added to
landfills, treatment of labor in developing countries, and recycling issues are the major
issues of concern to consumers. Child labor producing athletic footwear in foreign
countries also is an issue.

B.

Vision Statement (proposed)

To become the most trusted global provider of athletic apparel and footwear in the world.

C.

Mission Statement (actual) (corresponding components listed below)

Nike, Inc. is the largest seller or athletic footwear and athletic apparel in the world (2, 3).
Performance and reliability of shoes, apparel, and equipment, new product development,
price, product identity through marketing and promotion (7), and customer support and
service (1) are important aspects of competition in the athletic footwear, apparel, and
equipment industryWe believe we are competitive in all of these areas. The company
aims to lead in corporate citizenship (8) through proactive programs that reflect caring for
the world family of Nike, our teammates (9), our consumers, and those who provide
services to Nike.
1.
2.
3.
4.
5.
6.
7.
8.
9.

Customer
Product or services
Markets
Technology NOT INCLUDED IN ACTUAL
Concern for survival, growth, profitability - NOT INCLUDED IN ACTUAL
Philosophy - NOT INCLUDED IN ACTUAL
Self-concept
Concern for public image
Concern for employees

210

D.

Class Discussion Questions

1.
Is Nike trying to supply products for too many sports? Should Nike narrow its product
line in athletic shoes?
Nike presently sells about 300 models of athletic shoes in 900 styles for at least 24
different sports. If the company sold fewer styles, economies of scale would be better. However,
the variety of models offered by the company is part of the reason that company is so successful.
The number of models sold is not really as diverse as it sounds, since many of the models are
similar in basic design technology. Nike should be careful not to diversify too much. As long as
the company can effectively serve the customers and continue to provide quality products, the
diversification is not a problem. Nike is #2 in soccer and wants to be a major presence in golf.
The company should continue to try to gain competitive advantage in some sports while providing
shoes for many other sports.
2.

What types of acquisitions would you suggest to Philip Knight for Nike?

The company could purchase other brands of causal or dress footwear. In addition, the
company could expand its offerings of accessories by purchasing swimwear, casual clothing, or
fitness clothing companies. Nike should also continue its marketing toward the youth market by
producing sports sandals and work boots for teenagers. Perhaps the company should acquire a
smaller competitor that sells shoes for the youth market interested in snow boarding,
skateboarding, etc.
3.

Should Nike begin producing some of its own products?

No. Nike has an advantage in contracting for the manufacture of shoes. The company
does not have to invest in plant and equipment and long-term debt is low. This allows Nike to be
able to shift its product mix more quickly than if they produced their own shoes. Contracting for
the manufacture of shoes also allows the company to concentrate on its research and development
efforts.
4.

Is Nike taking the correct approach in marketing its shoes internationally?

Nike is already second in Europe (behind Adidas-Salomon AG, a German company). The
company is doing well in Europe and should continue trying to increase its sales in that area.
Nike operates in several Asian countries such as Japan and Korea and continues to exploit that
market. The company should continue its aggressive marketing of shoes in international markets
especially in sports such as soccer. The cost savings generated by moving the Asia headquarters
to the U.S. and reducing the number of international employees should provide some cost savings
in international operations.
Nike has not had the international success will print and TV advertising that it has in the
U.S. The company has opened adverting agencies in London, Tokyo, and Amsterdam so that
advertising can be developed by local people to fit with local cultures. This approach should
provide a marketing advantage for Nike in its international promotional efforts.

211

5.

What changes in product and advertising should the company pursue to appeal to the aging
baby boomers? To generation Y?

The company seems to do a good job appealing to baby boom age group. Many of the
sports stars who are used in advertising are near the baby boomers in age. In addition, marketing
the products as technologically superior appeals to the well-educated baby boomers. The sense of
style, in the advertising and in the shoes themselves seems to appeal to this group also. Nike will
need to continue to adapt its offerings as this group ages if the company wants to continue
appealing to this large group of consumers.
Nike markets its Outdoor Division shoes and sports sandals primarily to this group.
Generation Y, mostly children of the baby boomers, is almost as large as the baby boom
generation. This is the future for Nike. They should concentrate on building brand awareness in
younger teens by offering products that appeal to them (Triax watches may catch the attention of
this group). For generation Y, Nikes traditional product line will likely not inspire purchases.
6.

How can Nike maintain a competitive advantage over Reebok?

The key to maintaining a competitive advantage in this industry is providing a superior

product and marketing it well. The company must make sure that its manufacturers continue to
produce quality products. Continuing to improve technology should also help Nike keep the lead
in market share in the industry. Advertising must be creative and must be changed frequently to
keep the attention of the public. In addition, it appears that gaining a competitive internationally
is the key to continued success in this industry. Nike is well on its way internationally and should
continue to aggressively exploit opportunities.
7.

Is Nike responding correctly to concerns about the treatment of employees in international

manufacturing facilities?

Nike has probably done more than any other athletic shoe manufacturer to ensure that
employees in its international manufacturing operations are treated appropriately. However, this
is an ever-changing situation and Nike must continue to monitor the situation. The hiring of a
vice president of social responsibility illustrates Nikes commitment to the publics concerns about
this issue. Nike could do more to help the communities where their manufacturing facilities are
located and could monitor salary issues more to ensure that a fair and living wage is offered.
8.

How serious are the problems Nike has faced in the last five years? Can the company create
growth that is profitable and sustainable? How can the company revitalize its U.S. footwear
business?

Nikes problems are significant because brand is not as important as it once was for athletic
shoes and consumers now prefer other types of shoes for casual wear. Since Nikes success was
based on both of these issues, the company will have to find new competitive areas to exploit.
Perhaps their sponsorship of the U.S. Womens Soccer team and the visibility of the Nike logo at
soccer events will provide additional sales for sports related products. Another positive for the
company is its creative, innovative advertising that appeals to all age groups.

212

One of the ways Nike can revitalize its U.S. market is by providing shoes at the mid-price
range for consumers. It appears that in the last few years, the company chose to offer the U.S.
market only low and higher priced shoes. Adidas gained some U.S. market share by providing
mid-priced shoes. Nike will also likely need to search for more creative ways to market their
products to adults who are not active athletes.
9.
Has Nike chosen the appropriate targets for new marketing efforts? Can the company be
successful in gaining market share among women? Can the company be successful in the extreme
sports segment of the market?
Golf is an excellent choice for the companys marketing efforts. Nike managers believe
there is much profit potential here because of the sports popularityand company spokesperson
Tiger Woods. It will likely be more difficult to gain support among women. The company plans
to begin this effort by focusing on apparel. The company must target women who are not
traditional athletes. Perhaps promotions at exercise classes in health clubs are a better approach
than TV and print ads. The companys success in extreme sports will be the most difficult
challenge since certain brands are already well-know in those sports. The company will need to
hire some extreme sports stars to help to change the mind of youth about the quality of Nike
products for extreme sports.

E.

External Audit
Opportunities
1. There are increasing international competitive opportunities in the Unified European
market as well as in Asia and the former Russian republics.
2. Buyers are brand conscious.
3. A generation that rivals the baby boomers in size (Generation Y) is a good future
market.
4. People are living longer.
5. The peak earning years are 45 - 54 and the largest group of adult consumers (baby
boomers) is moving into this age group.
6. Two wage earner families can more easily afford higher priced athletic shoes.

213

Threats
1. The industry is very competitive.
2. Most people do not exercise at the levels that are suggested by experts.
3. Overseas production is vulnerable to political and governmental unrest.
4.The major competitors are seen by many consumers as providing very similar products.
5.Economic conditions negatively affect spending for higher priced athletic wear.
6.The youth market is demanding other types of casual shoes instead of athletic shoes.
7.Economics in international markets are often very volatile.
EFE Matrix
Key External Factors
Opportunities
International competitive
opportunities
Brand conscious buyers
Future market - generation Y
People are living longer
Large number of people at peak
earning years
Two wage earner families
Threats
Competitive industry
People exercise less that
suggested
Overseas production
Competitors are seen as similar
by consumers
Economic conditions
Youth market demands other
types of casual shoes
Volatile international economies
TOTALS

Weight

Rating

.10
.04
.10
.04

WS

3
3
4
3

.10

.30
.12
.40
.12

.30

.08

.24

.10

.30

.05
.07

4
2

.20
.14

.10
.08

2
2

.20
.16

.04
.10

1
1

.04
.10

1.00

2.62

214

Competitive Profile Matrix

Nike
Adidas
Reebok
----------------------------------------------------------------------------------------Key Success
Weight
Rating WS
Rating WS
Rating WS
Factors
----------------------------------------------------------------------------------------Brand Recognition .15
4 .60
4 .60
4 .60
Market Share
.14
4 .56
3 .42
3 .42
Financial Strength
.13
3 .39
2 .26
2 .26
Research and
Development
.10
4 .40
3 .30
3 .30
Product Quality
.10
3 .10
3 .30
3 .30
Advertising
.12
4
.48
3 .36
4 .48
Number of Retail
Outlets
.05
4
.20
3 .15
3 .15
Product Mix
.11
3
.33
3 .33
3 .33
Depend on Suppliers
for Quality
.10
2 .20
3 .30
2 .20
------------------------------------------------------------------------------------------TOTALS
1.00
3.26
3.07
3.04

F. Internal Audit
Financial Ratio Analysis for Nike as of July 2002
Industry: Footwear
Sector: Consumer Cyclical
Source: www.investor.stockpoint.com
Nike
Valuation Ratios
P/E Ratio (TTM)
P/E High - Last 5 Yrs
P/E Low - Last 5 Yrs
Beta
Price to Sales (TTM)
Price to Book (MRQ)
Price to Tangible Book (MRQ)
Price to Cash Flow (TTM)
Price to Free Cash Flow (TTM)
% Owned Institutions

19.36
70.87
14.11
0.98
1.31
3.31
3.73
19.36
NM
54.93

Dividends
Dividend Yield
Dividend Yield - 5 Yr Avg
Dividend 5 Yr Growth Rate
Payout Ratio (TTM)

1.01
1.00
4.78
19.24

Industry

Sector

S&P 500

18.07
66.78
12.48
1.00
1.14
2.96
3.29
17.32
13.49
56.57

20.59
45.24
9.00
1.02
0.85
2.55
8.28
12.01
14.29
48.07

24.26
49.85
17.38
1.00
2.66
3.95
6.41
16.94
32.95
60.49

1.07
0.86
-4.45
14.64

2.55
2.28
7.35
24.73

2.37
1.32
7.88
28.95

215

Growth Rates %
Sales (MRQ) vs Qtr 1 Yr Ago
Sales (TTM) vs TTM 1 Yr Ago
Sales - 5 Yr Growth Rate
EPS (MRQ) vs Qtr 1 Yr Ago
EPS (TTM) vs TTM 1 Yr Ago
EPS - 5 Yr Growth Rate
Capital Spending - 5 Yr Growth Rate

8.01
4.26
1.49
27.88
13.76
-1.74
-100.00

5.78
4.33
4.98
17.99
5.09
7.39
-63.31

2.38
0.85
7.96
38.44
3.81
-1.74
1.01

0.81
1.66
11.89
10.50
0.51
8.46
9.96

Financial Strength
Quick Ratio (MRQ)
Current Ratio (MRQ)
LT Debt to Equity (MRQ)
Total Debt to Equity (MRQ)
Interest Coverage (TTM)

1.30
2.26
0.16
0.29
22.37

1.55
2.72
0.16
0.28
20.31

1.29
2.10
1.59
3.43
4.00

1.14
1.68
0.67
1.03
9.12

Profitability Ratios %
Gross Margin (TTM)
Gross Margin - 5 Yr Avg
EBITD Margin (TTM)
EBITD - 5 Yr Avg
Operating Margin (TTM)
Operating Margin - 5 Yr Avg
Pre-Tax Margin (TTM)
Pre-Tax Margin - 5 Yr Avg
Net Profit Margin (TTM)
Net Profit Margin - 5 Yr Avg
Effective Tax Rate (TTM)
Effective Tax Rate - 5 Yr Avg

39.30
38.44
10.76
11.61
10.28
9.11
10.28
9.11
6.75
5.75
34.31
37.12

39.18
38.40
10.24
10.94
9.55
8.71
9.53
8.68
6.22
5.50
34.24
36.02

26.34
28.01
9.56
12.06
5.01
7.21
4.44
7.13
2.99
4.57
32.33
36.64

46.88
48.30
20.40
21.94
17.24
18.20
14.58
17.14
9.48
11.25
33.29
35.74

Management Effectiveness %
Return on Assets (TTM)
Return on Assets - 5 Yr Avg
Return on Investment (TTM)
Return on Investment - 5 Yr Avg
Return on Equity (TTM)
Return on Equity - 5 Yr Avg

10.79
9.47
15.06
13.85
17.91
16.01

10.52
9.67
14.65
14.04
17.27
17.17

4.20
5.98
6.08
8.79
5.96
16.95

5.83
7.91
9.51
12.71
16.95
21.47

435,815
29,441
5.69
4.20
1.60

415,807
26,872
7.82
4.23
1.71

323,176
15,857
5.42
8.98
1.11

550,826
78,805
9.56
10.19
0.97

Efficiency
Revenue/Employee (TTM)
Net Income/Employee (TTM)
Receivable Turnover (TTM)
Inventory Turnover (TTM)
Asset Turnover (TTM)
www.investor.stockpoint.com
July 2002

Net Worth Analysis of Nike in $millions at 12-31-01

1. Stockholders Equity + Goodwill $383.7 + 437.8
2. Net income x 5 = $663.3 x 5

$
$

1,047
3,316

3. Share price = $55 /EPS = $2.49 x Net Income $663.3

4. Number of Shares Outstanding X Share Price = 170 x $55

$ 14,651
$ 9,350

216

Method Average

7,091

Strengths
1. Reduced both long- and short-term debt from 2000 to 2001.
2. The company sells casual shoes in addition to athletic shoes (Cole Haan and Tensile Air).
3. Research and development represents only a small proportion of costs, but this is enough
to keep the company's products on the cutting edge.
4. Television ads are creative and use celebrity spokespersons effectively.
5. The accessories are very fashionable and take advantage of the Nike logo and name.
6. The Swoosh logo is very recognizable.
7. The company offers a wide variety of models and styles for more than 24 different sports.
8. The strategy of contracting production to foreign manufacturers keeps capital investment
costs low.
9. The company is building a competitive advantage in Europe, the Asia/Pacific region, and
Latin America.
10. The company has advertising offices in international markets to take advantage of local
talent.
Weaknesses
1. Research and development costs increase the selling price of shoes.
2. Contracting the manufacture of shoes lengthens the channel of distribution and the final
price of shoes to consumers is much higher that the manufacturer's cost to produce the
shoes.
3. Research and development efforts focus on five years in the future. If other companies
develop technology sooner or consumer trends shift, the company could lose a significant
amount of research time/money.
4. Sports stars who become injured or retire from competition could negatively affect the
company's sales.
5. Quality of supply is dependent on the contract manufacturer.
6. Response to social issues such as producing shoes outside the U.S. and concern about
working conditions in some foreign factories could negatively impact image.
7. Net income decreased 50 % in 1998, in large part due to sales problems in international
markets. International sales began to rebound in 1999, but are not yet back to 1998
levels.
8. U.S. sales are significantly lower than they were in 1997.

217

IFE Matrix
Key Internal Factors
Strengths
Reduced debt
Varied product mix (casual shoes)
Small percent of cost is R & D
Creativity in TV advertising
Fashionable accessories
Recognizable Swoosh logo
Variety of athletic shoe models
Manufacturing strategy
Building of international
competitive advantage
Advertising agencies opened in
international markets
Weaknesses
R & D costs increase shoe price
Lengthened distribution channel
increases final cost of shoes
Five year focus of R &D
Injuries of spokespersons
Quality dependent on supplier
Potential for negative image
Net Income decrease in 1998 (50 %)
U.S. sales still below 1997 levels
TOTALS

G.

Weight

Rating

WS

.02
.07
.08
.10
.05
.07
.05
.08

3
3
4
4
3
3
3
3

.06
.21
.32
.40
.15
.21
.15
.24

.04
.06

3
3

.12
.18

.06

.12

.07
.02
.02
.05
.04
.07
.07

1
2
2
1
1
1
1

.07
.04
.04
.05
.04
.07
.07

1.00

2.54

TOWS Analysis
S-O Strategies
Expand more into international markets by concentrating on the European Community
countries,
Asia, Latin America, and the former Russian Republics. (S 1, 9, O1)
Continue extensive advertising campaigns. (S 1, 4, O 2,3)
Acquire other brands of casual/dress men's shoes. (S 1, 2, O2)
Acquire other brands of casual/dress women's shoes. (S 1, 2, O2)
License the swoosh to be used on other products (S6, O2)
S-T Strategies
Develop a line of moderately priced athletic shoes. (S2, 7 T2, 6)
218

Continue to develop new technologically advanced athletic shoe models. (S3, T1)
Open more Nike Athletic Shoe stores in malls. (S2, 5, 6, T4, 6)
W-O Strategies
Develop more advertising campaigns for the youth market. (W 4, 6, O 2, 3)
Develop products specifically for the youth market (both fashion and extreme sports) (W8,
O3)
W-T Strategies
Begin offering products through a company catalog. (W 7, 8, T1, 4)
Acquire a less expensive brand of accessories and sportswear. (W8, T5)
Manufacture some of its own athletic shoes and/or accessories. (W5, T2)
Stop celebrity endorsements. (W4, T4)

H.

SPACE Matrix

INTERNAL STRATEGIC POSITION

EXTERNAL STRATEGIC POSITION

Financial Strength (FS)

Environmental Stability (ES)

Sales and net income

increase
Liquidity
Working Capital
Long-Term Debt

Price range of
competing products
Competitive pressures
Barriers to entry
Rate of inflation

+2
+4
+3
+4
---FS Average + 3.25

---ES Average

Competitive Advantage (CA)

Industry Strength (IS)

Market share
Customer loyalty
Technological
know-how

Growth potential
Profit potential
Financial stability
Capital intensity
Ease of entry into
market

-2
-4

-1
---CA Average -2.33

-4
-5
-3
-2

IS Average

- 3.5

+3
+4
+4
+3
+1
---+ 3.0

x-axis -2.33 + (3.0) = + .67

y-axis -3.5 + (3.25) = + .25
Conservative

FS

Aggressive

219

CA

IS

Defensive

I.

ES

Competitive

Grand Strategy Matrix

RAPID MARKET
GROWTH
Quadrant II

Quadrant I

Nike
WEAK
COMPETITIVE
POSITION

STRONG
COMPETITIVE
POSITION

Quadrant III

SLOW MARKET
GROWTH

Quadrant IV

220

J. The Internal-External (IE) Matrix

The IFE Total Weighted Score
Strong
3.0 to 4.0

Average
2.0 to 2.99

Weak
1.0 to 1.99

II

III

IV

VI

High
3.0 to 3.99

Medium
The EFE Total 2.0 to 2.99
Weighted Score

Nike

Low
1.0 to 1.99

VII

VIII

IX

Hold and Maintain

K.

EPS-EBIT Analysis (in $millions at 12-31-01)

$Amount Needed: $500
Stock Price $55
EBIT Range $1000 to $2000
Tax Rate 349/1017 = 34%
Interest Rate 5%
#Shares Outstanding 170

EBIT ($1,017 in 2001)

Interest (5%)
EBT
Taxes 34%
EAT
# of Shares Outstanding
EPS

Common Stock Financing

High
Low
$2000
$1000
0
0
2000
1000
686
343
1314
657
179
179
7.34
3.67

Debt Financing
High
Low
$2000
$1000
25
25
1975
975
677
334
1298
541
170
170
7.63
3.18

221

Conclusion: Nike should use debt to raise the $500 million on the High EBIT estimate but should
use stock on the Low EBIT.

L.

Epilogue
Nike expects sales and earnings to increase during the 2002 year. The company will
emphasize soccer and will attempt to become the number one provider of soccer shoes and
clothing. In addition to soccer, the company will focus on increasing sales in its golf line
with Tiger Woods as spokesperson and the Michael Jordan brand. In February 2002, the
company launched it line of golf clubs. Expectations are that golf will provide $90 million
in sales in 2002 and $300 million in 2003. In the second quarter of 2002, profit was $129
million, up 8% from a year ago. The company continues to improve its supply chain
management and hopes to be even more efficient in getting needed merchandise to stores in
2002 and beyond.
On June 28, 2002, Costa Mesa Surf and skateboard clothing manufacturer Hurley
International launched a new footwear line. Nike, which bought Hurley in February 2002, is
pairing its footwear expertise with Hurley's insight into its customers and market, said Mark
Parker, Nike Brand president. Hurley shoes' potential is "very, very significant," he said.
Hurley's move heats up competition with Quiksilver Inc. of Huntington Beach, the #1
surfwear company with annual sales of $615 million. Hurley, considered edgier, logs $70
million in annual revenue but is now backed by $10 billion behemoth Nike. Quiksilver,
which is developing a young men's shoe line, saw the potential for the new category after
the success of Roxy shoes, which grew into a $20 million business in about four years.
Roxy is Quiksilver's red-hot brand for young women.
Nike earned $208.4 million, or 77 cents per share, for the fourth quarter of 2002, beating
the consensus forecast of 75 cents per share by analysts surveyed by Thomson
Financial/First Call. During the same period ending May 31 in 2001, Nike earned $162.7
million, or 60 cents per share. For the fiscal 2002 year, Nike earned $663.3 million, or
$2.44 per share, up 12 % from $589.7 million, or $2.16 per share, during 2001.
On June 25, 2002, the stunning exits of World Cup favorites such as Argentina, France
and Spain had done little to lessen the intensity of the off-field battle between Nike and
Adidas. Each of the multinational sporting goods producers hoped that its team wins the
World Cup Trophy, leading to potentially higher sales of football boots and other gear. A
local marketer quipped that the semi-final between South Korea and Germany could just as
easily be Adidas versus Nike. Germany is one of the 10 teams sponsored by Adidas. The
others are France, Argentina, Sweden, Spain, Turkey, South Africa, Saudi Arabia, China and
Japan. In addition to South Korea, Nike has backed the United States, Portugal, Brazil,
Nigeria, Croatia and Russia. As an official World Cup sponsor and ball supplier, Adidas is
well ahead of Nike in global sales of soccer products.

222