Macroeconomics and microeconomics of Nike, inc
Nike, Inc., was founded as Blue-Ribbon Sports in 1964 by Bill Bowerman along with Phil Knight. Blue-ribbon was a former coach and Phil Knight was one of his students. Blue-Ribbon’s first outlet was opened in 1966. With the gradual progression, Nike Inc. was established as a brand in 1972. After the success of Nike shoes, the company was renamed as Nike, Inc. in 1978. Nike had outlets and distributors in more than 170 countries by the earliest of the 21st century and is recognized throughout the world by its logo, curved checkmark, and swoosh.
Nike, Inc. expanded its business steadily from the late 1980s and diversified its product line via several purchases. Cole Haan and Converse, Inc., And Canstar Sports, Inc., for the sports shoe and apparel production. In 1996 Nike created Nike ACG, which deals in sports products for extreme sports like snowboarding and mountain biking. Not only this, but Nike also began selling sports-technology gadgets. Nike is developing and upgrading its products regularly and has emerged as a leading brand in shoes and accessories among its competitors. Its economic and non-economic strategies are world-class, enabling it to survive and protect itself from external exposures.
Nike’s market exposure
Nike is an international organization engaged in the design and development of footwear, apparel, and accessories along with their global marketing and selling.
Figure 1 Nike Sport Line Breakdown as % revenue (Source: Nike Annual Report 2019)
As of 2019, Nike had a total of 768 retailers in worldwide markets while 384 of them are in the United States. Nike’s business expansion and fame are by dint of focussing on its research and development to bring innovative products and selecting sustainable materials for footwear and apparel. Along with research, Nike has outsourced most of its production. According to a 2018 report, there are around 124 footwear factories and 328 apparel factories manufacturing Nike products worldwide.
Figure 2 Nike retail stores worldwide from 2009 to 2020 (Source: Statista)
Over the years, competition in the athletic footwear and apparel industry has grown significantly. But Nike has got a lead over its opponents due to several factors like its unique designs, product and process innovation, excellent product quality, and marketing. These factors have helped its financial performance keep growing over the years, and Nike’s growth is evident from its revenue growth over the past five years.
Nike and Monopolistic Competition
Nike is an example of monopolistic competition. It is defined as the market structure with perfect competition conditions except for identical products. Nike has perfect competition with its competitors in terms of prices, except their products are not precisely like that of Adidas and Under Armour. Mainly, monopolistic competition is deliberated by product differentiation, whether the product difference of different brands is real or apparent. The monopolistic competition also allows companies to maximize their profits by expanding their production while maintaining marginal costs equal to their marginal revenue.
The above graph shows the demand curve i.e. relation of price to demand curve for Nike shoes where D represents the demand curve, MR represents Nike’s marginal revenue curve, MC represents the marginal cost curve, and ATC is the average total cost curve for Nike. Being in monopolistic competition, Nike tends to maintain equilibrium between its marginal cost and marginal revenue, i.e. 120, in this case, to maximize its profit.
Monopolistic competition is considered an example of imperfect competition. Imperfect competition is when there are many vendors of a product or service, but their products do not have any obvious variances. Like, Nike, Adidas, Reebok, and many other shoe brands all sell basketball shoes at approximately a similar price.
Figure 4 Median price of popular sneaker brands (Source: Priceonomics)
The other aspects in which these brands differ from one to the other are negligible. Businesses in the Monopolistic Competition emphasize “nonprice differences” to promote their products. So, in the shoe industry, a Monopolistic Competition exists where many producers sell similar products at almost the same prices to many consumers, and not a single company has total control and supremacy.
Nike and the new market entry threat
According to research, new competitors to a business bring in a new market capacity with their entry. It enters with a wish to increase market share that ultimately puts pressure on prices, costs, and the investment rate essential to compete among all the competitors. Whether a new entry in an industry is threatening already present competitors or not it mainly depends on the difficulty of entry barriers present in the market and the reaction expected from old competitors of a similar product (Porter, M.E., 2008).
The industry research conducted in 2006 supports that the athletic wear industry, whether footwear or clothes, is already a very competitive and saturated industry with renowned brands like Nike and Adidas, etc. The industry has many well-established brands, new competitors, and local companies in the market. The early competitors in the industry were; Converse and Keds in 1917, then came Adidas in 1920, Reebok in 1958, and Nike in 1964. These brands formed the foundations of the footwear and apparel industry and set very high entry barriers with every passing year. These entry barriers have made it very hard to gain a market share for new entrants.
Figure 5 Nike Market share in footwear (Source: Sustainable Practices in Luxury Apparel Industry)
Figure 6 Nike Market share in apparel (Source: Statista)
Amongst all the famous brands in the footwear and apparel industry, Nike has a significant market share with the brand, potential consumer devotion, and sturdiest circulation outlets. Footwear industry analysis (2006) also shows that entry barriers are high in the industry, resulting in a low threat of new entry.
Evidence of PED and elasticity of Nike’s income
Price elasticity of demand (PED) is commonly described as the parameter to measure the relationship between a change in quantity demanded of a product to the relative change in its price and vice versa(Hubbard, G.P. and O’Brien, A.P., 2015). PED is also used for the evaluation of price sensitivity. It also determines the degree of the sensitivity of demand to the change in a product’s price. Based on the past data, it can be seen that the price of Nike’s footwear products has increased. There has been a sturdy increase in the price of Nike footwear products.
Similarly, amid several factors, Nike’s products’ demand has also been rising, even when prices are kept high. Although there are substitutes available for Nike’s products, Nike’s products have still been in a higher demand. PED can be calculated using the following equation.
The response in demand of quantity and relative change in price can vary significantly. That’s why the baseline to measure price elasticity of demand is whether the PED coefficient is equal, greater, or less than one. If there is linear relationship between the quantity and demand, the concept is referred to as unit elasticity.
Figure 7 Price Elasticity of Demand (Source: Elasticity and the Demand Curve)
PED can also be:
- <1 means PED is inelastic.
- >1 which is elastic.
- 0 signifies PED is perfectly inelastic.
- ∞ specifies perfectly elastic PED
By reviewing Nike’s product demand and changes in product prices over the years, it can be said that the price elasticity of demand for the case of Nike is less than one. This PED is also because the change in quantity demanded for Nike’s products is smaller than the change in price maintained or kept by the company for its footwear products. It is also because the company has a fixed market share, which is more than any other company in this industry. Nike’s products are not substituted much by the consumers, and therefore a change in demand is not much. So, the price elasticity of demand for Nike can be considered as less than 1.
From an economic point of view, few factors indicate the inelastic income of a company. The customer’s taste has an ultimate impact on the demand whereas the upsurge in customer taste will rise the demand curve. Many societies use numerous brands because of these differences in preferences and taste. For instance, markets for Nike products in the United States and Europe are normally deliberated as clear leaders, as most of the revenue is generated from these markets.
Figure 8 Nike Operating Segment Breakdown as % revenue (Source: Nike Annual Report 2019)
Next, the numbers of buyers are also one of the reasons that affect demand. Here comes the role of effective branding, employing the celebrities like Tiger Woods in the Nike footwear advertisement, more attention of the general public can be captured. As more and more people will want to buy the products which their favorite celebrities wear. (Martin, B.C., McNally, J.J. and Kay, M.J., 2013).
As the number of customers of Nike products rises, the demand will upsurge likewise
Figure 9 Demand Curve Shift with price and quantity change
The above graph shows the relation between the demand and quantity. As the demand curves shift to the right the quantity of production also increases. This implies that consumers start to like the shoes’ design as the design of shoes gets better and more excellent. Besides, the taste of a consumer can cause a change in demand. However, there is a possibility of a decrease in the number of potential customers if the competitors launch competing products, if this happens the graph flows from right to the left as the demand decreases and the production quantity decreases too.
Competition investigation against Nike
Nike has been the subject of competition investigations or regulations. Nike has been a trusted brand that manages the intellectual property rights (IPRs) of most football clubs and football federations. This strategy compels Nike to make products that are not only compatible with Nike’s vision but also feature the club or league branding. Nike also grants non-exclusive licenses of the related IPRs to third parties, allowing them to produce and supply club products to sellers and customers.
In 2017, the Commission opened an inquiry into Nike’s performance in these licensing contracts. It eventually found that over 13 years starting in 2004, Nike had illegitimately constrained traders from selling licensed stock cross-border and online within the EEA, breaking the EU and EEA competition law. Nike’s practices had meant to partition the market and prevent cross-border trade, to the detriment of consumers.
The European Commission verdict against Nike fined the sports retailer €12.5 million for EU competition law breaches. The incidents like this have greatly helped Nike in reframing and reviewing the merchandising term of conditions in order to avoid such law breaches in the future. Now Nike is more focused on establishing compliance with competition law.
Nike’s Vulnerability in terms of its Cost
The average total cost curve is obtained from the average sum of the fixed cost and the variable cost of the shoes:
Figure 10 Total, Variable and Fixed Costs (Source: Lumenlearning)
Equation 2 Total Cost
Dividing by the quantity the average total cost of Nike can be computed, which can later help in comparison with the marginal cost of the product.
It yields us with:
Equation 3 Average total Cost
By comparing the average total Cost with the marginal cost of the products, the short-range average total Cost (SRATC) can be estimated. The cost analysis shows that for Nike inc. The average cost curve is U in shape, which emphasizes that ATC is the cumulative average of the marginal costs. Moreover, the ATC of the products falls until the average cost of the product is greater than the MC.
For companies like Nike, which are in monopolistic competition over the greater period, they enter the “economies of scale” region. With time Nike has grown both in terms of factories and production, now the company can generate more output from per unit of input. Thus, the more significant the size and production of Nike, the lesser the production cost will be.
Figure 11 Economies of scale (Source: Lumenlearning)
However, the laws of economics put a constraint on the further reduction of cost at the expense of the burgeoning company. At this stage, Nike’s goal is to achieve the minimum long-term average total Cost (LTARC). Now in terms of Cost and production, ration Nike is experiencing constant returns to scale.
Figure 12 SRATC curve (Source: Lumenlearning)
The long-term average Cost of the production curve can be estimated by adding various SRATC curves. Above is the graph for the Long run average cost of Nike productions, the left side of the curve with the downward slope refers to the economies of scale. The more the output production, the lesser will be the average production cost in this region. The right side of the graph in the region where the economies of scale have been exhausted, and now the LRATC is a straight-line curve, in this region, the scale of the production no longer affects the average cost of the production. Hence, we can conclude that Nike is experiencing constant returns to the scale.
Macro-economic analysis of Nike
Nike is in an oligopolistic competition; the following graph shows the contribution of Nike, Adidas, and other competitors in the sportswear industry.
Figure 13 Nike Market share in Sportwear Industry (Source: Earnings Estimates Relative Financial Performance)
In oligopolistic competition, the prices are not frequently subjected to flexibility. The reason behind this is the tougher competition and the same price tag which various companies are striving for. The kinked demand curve hypothesis is presented to explain the price elasticity in the oligopolistic environment. The price demand curve of the NIKE is;
Figure 14 Price Demand curve of Nike
The kink curve has both the elastic and the inelastic region separated via the projection, i.e., kink. P here signifies the prevailing price level of the products while region OM corresponds to the demand and production. The upper region of the curve is elastic in nature, while the PD region is inelastic and is likely to affect less. In this oligopoly setting, if Nike decreases the prevailing Cost, then competitors will be bound to cut down their prices too else they will lose customers.
EBITDA Analysis of Nike
EBITDA (earnings before interests, taxes, description, and amortization) serves as a powerful metric for determining operating profitability. However, EBITDA ignores the Cost of capital debt and weaves the tax effects. The EBITDA can be calculated by the following expression.
Equation 4 EBITDA of a company
From the last fiscal’s year data, Nike’s EBITDA can be calculated as:
Figure 15 EBITDA of Nike (Source: inbox)
As the graph signifies that in the course of the last five years, Nike’s EBITDA boomed in the year 2019 and raised to a total of 5.492 billion dollars. But it has fallen back significantly in the year 2020, the lowest of all in the last five years, thus potentially indicating a profitability concern. Lower EBITDA also highlights the issue in the company’s cash flow. Nike can use its EBITDA as a non-GAAP gauge for cutting down costs and stabilizing the profitability curve.
ROCE Analysis of Nike
ROCE is another metric used for assessing the company’s profitability. ROCE analysis of Nike can help in understanding how efficiently the company is generating profits from capital investments.
ROCE trends of the last year of NIKE is:
Figure 16 ROCE of Nike (Source: inbox)
Larger bills due in the recent future can put a strain on the company’s capital employed. A comparison of Nike’s contemporary liabilities and assets can be used as a performance indicator. The company’s total asset is around 26 billion US dollars, while the liabilities are 8.3 billion dollars constituting 32% of the capital. Nike has always been appreciated to maintain a higher ROCE% than its competitors. Below here is the graph showing the comparison of Nike’s ROCE with one of the leading competitors Adidas:
Figure 17 Comparison of ROCE of Nike and Adidas (Source: inbox)
The Higher ROCE highlights that greater profit chunks can be invested back into the company, ultimately benefitting the shareholders. This reinvested capital amount is bound to generate more revenue.
Fiscal and monetary policy
Among the macroeconomic analysis parameters, aggregated demand is one of the vital concepts that focus on the total demand for production goods. The metric is frequently used as the potential measure of economic growth. According to the Fiscal year report 2018, Nike spends 3577 M$ on-demand creation, the more significant the demand creation expense, the greater will be the consumer turnout and aggregated demand.
The aggregated demand is a multifaceted parameter depending upon fiscal and monetary policy. As can be seen from the aggregated demand formula:
Equation 6 Aggregated Demand
Fiscal policy is a measure of the government’s spending on the public and private sectors along with the applicable tax rates. US expansionary fiscal policy helped the company in strengthening its ground in the parent country. Nike has prevented the negative shift in its aggregate demand by the application of Keynesian economic principles. The course of the policies made by the Federal reserve immensely assisted Nike in prospering. The favourability of the US monetary policy has much to do with the growth of Nike. The federal reserve maintained a stable foreign exchange rate and minimum inflation, which encouraged the growth rate of Nike. Setting on the economic revolution via:
- open market operations
- discount window
- reserve requirements
the health of the US economy burgeoned favorably.
This economic success led to the more significant sale of Nike goods in the national and international market. It boosted the company’s confidence in contributing more toward capital expenditures.
Non-economic factors analysis of Nike
The non-economic factors also significantly contribute to the productivity growth of the companies over extended periods. Economist Z.Bazdan compared the economic growth of companies with social development; he stated that in countries where democracy is prevalent, and poverty is less, economic and social development go hand in hand (Bazdan, 2008). In the recent past, economic science research focuses on the non-economic factors that significantly impact companies’ economic growth like culture, religion, tradition, and social and political dependence of the individuals. Regarding these non- macroeconomic exposures, Babic presented the relation Yt=F(K, L At), where the A signifies productivity. The variable is stated as the Solow residual and is observed to be lower in developing countries. Economists consider A as the vector of the non-economic factors affecting the company’s macroeconomy trends. Economists have long been trying to discover what is hidden in the black box of Solow residual. Now they have collectively agreed upon intellectual capital, i.e., human factors like labor productivity play a vital role in organizational development. PESTEL analysis provides economists with the framework to analyze the impact of the macro-environmental factors on an organization; it provides the threats and the weaknesses that are likely to affect the company; PESTEL analysis is often preliminary to the SWOT analysis.
The political factors govern the organizations at the back end, though at the surface, their effect could appear nominal. As Nike makes consumable physical goods, so it has always been subjected to tax changes and laws liabilities. The bans on international trade can limit the consumer circle. The US being the parent home to Nike, provided a favorable environment like the international trade arrangements and low-interest rates. Thus political factors are deterministic in the survivability of an organization. The S stands for social; this factor has emerged as the prime contributor in the recent past. The increased awareness of the general public and societal trends tend to affect the flourishment of an organization. Increased fitness awareness has readily boosted the sales of the company. E stands for the environment. The increased cognizance of green production has earned the company some criticism about the dubious sweat dress production. Nike’s new strategies are mostly focused on eco-friendly production. T stands for technology; the organizations which keep pace with the technological evolutions pass the test of time. The use of technology can be taken as a double-edged sword, which can either whittle or boost sales. Nike, in this regard, has kept a strong brand promotion game. L stands for the legal; legal factors are often submerged in the political factors. Improving the quality of the employment status of workers in developing countries is a legal factor that tends to affect the company’s profile. Acting upon the health and the safety regulations are the other example of the legal liabilities upon Nike.
Organizational and financial strategies of Nike
Nike used the structured approach in its corporate objectives. The table here signifies the three main parameters upon which the company’s survivability can be dependent. Nike kept the focus on all these parameters over the course of the year in order to improve return on equity and maintain higher EPS. On the scale of 1 the parameters had been rated. The individual ranking of the parameter is done on a scale of 1 to 5, where 1 corresponds to the undesirable and 5 corresponds to the desirable.
Table 1 Maintenance strategies of Nike- An overview of the structured approach (Source: Strategic Analysis of Nike, Inc.)
|Criteria and its value to Nike||Concentration||product||market development|
|Rating||weighted score||Rating||weighted score||Rating||weighted score|
|Distinctive competency (0.35)||4||1.40||5||2.||3||1.|
The comparison shows that product development should be the overriding strategic concern for the company. Nike maintained the balance between the demands of the consumers and the standards of the competitors. The next factor Nike kept in consideration is concentration; with no second opinion, Nike has observed effective marketing strategies in the key global areas of the world.
Nike has overgrown as a mature sportswear brand that has been efficiently controlling the market share and making much revenue as compared to its competitors. Peeking into the past right from 2006 when Mark Parker became the CEO of the company, he carefully planned and looked for each opportunity. He was the one who introduced the “category offense strategy” and reorganized the structure of the company’s consumer segment; these changes earned him a revenue of 30 billion US dollars. Below here is the table exhibiting the organizational and functional strategies.
Table 2 Financial Strategies of Nike (Source: Strategic Analysis of Nike, Inc.)
|management of accounts||Implementation of stricter credit terms with retailers to minimize bad debt expenses. Proliferating the number of the staff in the corporate Accounts Receivable Department.|
|management of assets||Selling all the worn out and unused equipment at production site to cut down devaluation and maintenance expenditures|
Table 3 Human Resource Management Strategy of Nike (Source: Strategic Analysis of Nike, Inc.)
|Recruitment and Selection||Professional and technical education of the interested employees, by introducing the mentoring programs and workshops. These workers would achieve the maximum benefit from educational aid programs by staying more productive at Nike.|
|Training and Development||Along with the technical and professional development courses of the staff, the introduction of the general education programs for the low-rank employees to equip them to read and write on their own.
Arrange seminars and workshops for managers in factories so they can boost their productivity and manage their organization skills.
|Compensation||Upsurge salaries of factory workers who complete the educational courses and workshops.|
Table 4 Research and Development Strategy of Nike (Source: Strategic Analysis of Nike, Inc.)
|Focusing R&D sector||Move funding to carry out research in “up-and-coming” sports.|
|Allocation of budget||Pervade new funding, in addition to shifting current budgetary allocations, for researching sports that could generate revenue in the future.|
Table 5 Operational Strategy of Nike (Source: Strategic Analysis of Nike, Inc.)
|Market Research||Rental a market research firm accustomed to Asia, precisely the booming market of Japan. Understanding the buying habits of Asian consumers and observing what factors motivate their athletic footwear purchases.
Conducting the research at the sites of manufacturing to acquire the consumer opinion on both the products and samples.
|Pricing||Control price points for our Asian merchandise and offer packages and sales that are compatible with the income of the targeted population and sustain profit according to the currency exchange rates.|
|Advertising||Through advertisements, Nike promoted regional sports and educational institute teams. For raising the spirit of sportsmanship, the victories in the world cup were embraced. Used all the major media for advertisements that can address the maximum American population. The medias used were newspapers, magazines, and radios. For increasing the turnout ratio, discounts and sales were promoted in the advertisements. Choosing top retail venues to conduct the fashion shows and to display our latest products to consumers and the media.|
Comparison of Nike with the competitor
The organizational and functional strategies of Nike have given it dominance over the other competitors in the marketplace (Mahdi, H.A.A., Abbas, M., Mazar, T.I. and George, S., 2015). If Nike focuses on the R&D sector and keeps on persisting these strategies, the economic forecast is favorable. To strengthen the claim, Nike has been compared to its leading competitor Adidas on the grounds o the following metrics:
- Gross profit comparison
- Revenue growth forecast
- PE ratio (forward)
Gross profit comparison
Figure 19 Gross Profit Comparison of Nike and Adidas (Source: finbox)
The above graph shows the effectiveness of strategic planning of Nike. As the curve shows, Nike generated 16.11 B US $ while comparatively, Adidas generated 11.6 B US according to the last fiscal term$.
Revenue growth forecast
The revenue forecasting yield the analysts the future worth of the stock; thus, it dramatically determines the investors’ future turnout. The comparative analysis of the revenue growth forecast of both icons is:
Figure 20 Revenue Growth Forecast of Nike and Adidas (Source: finbox)
Nike is leading this index with 7.6%, which means there are favorable flourishing options for further investments wh. which is slightly lagging, expected to have 7.3% revenue growth over the next five years.
PE ratio is often the most desirable tool needed by the investors as it relates to the current sharing price with the EPS
Figure 21 PE ratio comparison of Nike and Adidas (Source: finbox)
Nike’s higher ratio emphasizes that the company’s stock is overloaded, and future investors are likely to be expecting higher revenue growth.
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