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The Hollow Swoosh: How Does Nike Work?

The power of just one tick

In the words of the business management expert Tom Peters, “you’re a damn fool if you own it.” This quote resonates deeply with the modern evolving corporate world and encompasses the philosophy of sneaker giant Nike.

In the eyes of Phil Knight, the company’s greatest CEO and co-founder Nike is not a company that makes and sells sneakers and athletic clothing. You may be confused, but he is right, it has been decades that Nike produced their own shoes within a factory owned by the corporation. The latest Air Jordans were probably produced by a third-party company that Nike outsources its production to.

Nike’s business model is revolutionary.  Much of the work involved within the company is now outsourced to third parties. Instead of once being responsible for a large workforce, Nike like other notable corporations such as Apple and Microsoft are beginning to outsource their production, customer services and other aspects of business to third parties.

More and more companies are moving away from just owning inventory

Research and development, as well as advertising, are the only significant sectors that Nike is involved in and actively works on. The tick on every Nike shoe means something, it is synonymous with tried and tested quality. Nike knows this and takes full advantage of it; the production of the shoe is identical whether they produce it themselves or if it is outsourced. Why did you buy Nike trainers to help you with your fitness aspirations? It all falls down to two reasons: advertising and design.

Just Do It. Nike’s famous three-word strapline is plastered across the world, the company endorsement roster spans sporting legends and icons including Michael Jordan, Cristiano Ronaldo, Lebron James, Serena Williams, Mo Farah and Kevin Durant. These public endorsements, adverts and events mean that Nike spends more than $3.2bn in “demand creation expenses,” which shows the power and importance the corporation give to their brand.

Nike is not alone in this modern business trend of focussing entirely on just research and advertising. Apple follows a very similar business model. If you look at the back of your iPhone you are likely to read, “Designed by Apple in California. Assembled in China.” Again, although apple’s research departments are in California, the production of their phone is outsourced to Chinese companies such as Foxconn.

This management mentality is theoretically beneficial. Why should a technology company invest in a production facility, transport logistics, customer service companies when companies already exist that are specialised in these sectors? It is inefficient and expensive, by outsourcing more resources can be allocated to branding and creating a better product, it’s a perfect win-win situation. Fewer expenses and costs for the company that eat at their margins and a better product for the consumers.

Very few know the story behind the production of these shoes.

However, this does come at the cost of a lack of control over your business. Generally, this is a small opportunity cost, but it has come back to haunt Nike. Some of Nike’s subcontracted factories located in the far east such as in Taiwan, Vietnam and Indonesia were found to be paying workers less than the minimum wage as well as being forced to work in unfair conditions. This resulted in widespread strikes and protests against Nike’s practices that were detrimental to their reputation.

Despite these allegations, Nike invests heavily in its ethics department and has managed to turn its image around by increasing their openness and auditing their contractors. After 25 years of manufacturing in the Asian region, Nike has a 47% market share of the US footwear industry with sales of $4bn. So, this style of business is clearly working for them, many businesses such as Microsoft and Apple are following suit, so could this be the future of the corporate world.