Professional Documents
Culture Documents
Submitted by: Anmol Dhar (22) Shefali Dixit (24) Bhupesh Dua (26) Ankita Dutta (27)
COMPANY OVERVIEW
Nike, Inc. was incorporated in 1968 when The University of Oregons track and field coach, Bill Bowerman, and his star runner, Phil Knight, thought they could better design and sell shoes to runners than what was available at the time. It is headquartered in Washington County, Oregon. Nike is many things a product designer, a consumer goods manufacturer, a brand communicator, a leader in corporate responsibility, and a portfolio of authentic footwear, apparel, and equipment brands. In each business Nike focuses on one thing innovation. Nikes principal business activity is the design, development, and worldwide marketing of high quality footwear, apparel, equipment, and accessory products. Nike is the largest seller of athletic footwear and athletic apparel in the world. The Company sells its products to retail accounts, including stores and internet sales, and through a mix of independent contractors. Virtually all footwear and apparel products are manufactured outside the United States, while equipment products are produced both in the United States and abroad.
Nike mines consumer insights and uses research and development to design premium performance athletic products. We contract with manufacturers to make and ship products to our owned and partner retailers around the world. We create demand for product through marketing and advertising, our presence in sports and our relationships with athletes (sports marketing). For Nike to be successful, the world of sport must be successful. To build our business, we have to fuel and respond to consumer interest around the world and continually appeal to changing demographics and new markets in a deeply competitive industry. We also stimulate growth through smart, effective investments in people, research and development resources and a well-managed supply chain. We increase shareholder returns by effectively managing our operating costs in proportion to our growth rates.
FINANCIAL SUMMARY
BUSINESS DESCRIPTIONS
Products
Nikes athletic footwear products, the leading revenue segment, are designed primarily for, but not restricted to, specific athletic use. The main emphasis that the Company places on its products are quality and innovation in products designed for men, women, and children. Nikes top-selling footwear categories are running, training, basketball, and soccer. Other footwear categories include aquatic activities, baseball, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses. Nike sells sports apparel and accessories relevant to each sport mentioned above as well as sports-inspired lifestyle apparel, including bags, socks, sport balls, eyewear, protective equipment, basic sport equipment, etc. Apparel and accessories for most sports are designed to compliment Nikes footwear products, feature the same trademarks, and are sold through the same marketing and distribution channels. It is often the case that Nike designs unique footwear styles for each sport, and apparel and accessories for each sport follow suit on that style. Nike also markets apparel with licensed college and professional team and league logos. In addition to selling products directly to consumers, Nike enters into license agreements that permit unaffiliated parties to manufacture and sell various apparel, equipment, and accessory items, such as swimwear, childrens apparel, training equipment, eyewear, electronic devices, and golf accessories. In addition to Nikes footwear, apparel, and accessories businesses, the Company sells products under other brand names in particular markets. Nike wholly-owns five footwear and apparel companies that specialize in different sports: Cole Haan, Converse Inc., Hurley International LLC, Umbro Ltd., and Nike Golf. Cole Haan, headquartered in Yarmouth, Maine, designs and distributes dress and casual footwear, apparel and accessories for men and women under the brand names Cole Haan and Bragano. Converse, headquartered in North Andover, Massachusetts, designs, distributes, and licenses athletic and casual footwear, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, and Jack Purcell trademarks. Hurley, headquartered in Costa Mesa, California, designs and distributes a line of action sports apparel for surfing, skateboarding, and snowboarding, youth lifestyle apparel, and accessories under the Hurley trademark. Umbro, headquartered in Manchester, England, designs, distributes and licenses athletic and casual footwear, apparel and equipment, primarily for the sport of soccer, under the Umbro trademark. Nike Golf, headquartered in Beaverton, Oregon, designs and markets golf equipment, apparel, balls, footwear, bags and accessories worldwide.
Manufacturing Footwear
Virtually all of Nikes footwear is manufactured outside the United States. Factories in China, Vietnam, Indonesia, and Thailand produced 98 percent of total Nike brand footwear in 2010. Nikes largest footwear factory accounted for five percent of 2010
footwear production The main materials used in Nike footwear are rubber, plastic compounds, foam cushioning materials, nylon, leather, canvas, and polyurethane films used for cushioning components. Nikes wholly-owned subsidiary, NIKE IHM (In House Manufacturing), which produces synthetic rubbers and polyurethane films, was the largest supplier of foam and cushioning components.
Manufacturing Apparel
Nike brand apparel is also manufactured almost entirely outside of the United States. Nike apparel is manufactured by independent contract manufacturers located in 34 countries. Nikes largest apparel factory accounted for five percent of 2010 apparel production. The main materials used in Nike apparel are natural and synthetic fabrics and threads, plastic and metal hardware, and water and heat resistant fabrics.
GEOGRAPHIC ANALYSIS
Nike branch offices are located in over 50 countries. The Company operates 14 international distribution centers and sells to more than 28,000 retail accounts outside the United States. The five wholly-owned subsidiaries comprised 13 percent of total revenue; eight percent of which was realized in the United States Region.
Major regions are: US Region EMEA (Europe, Middle East, Asia) Asia Pacific Region Americas Region Other Businesses
Nike recognizes significant growth opportunities in emerging markets, particularly in the Asia Pacific and Americas regions. From 2003 to 2010, total revenue growth for both regions was 144 percent. Other Businesses worldwide has also grown tremendously over the past six years, at 18 percent annually on average, reflecting the Companys success in its diversification strategy.
From 2003 to 2011, the Europe, Middle East, and Asia region average annual growth rate was more than ten percent. EMEA is Nikes second largest regional market, the Company must make enhanced marketing, product line, and sales initiatives to focus on changing consumer trends and demands in these markets to ensure that this main region remains profitable in the future. In the Asia Pacific region, changes in currency exchange rates accounted for three percent of revenue growth. Aside from currency impacts in the Asia Pacific region, all countries in this region delivered revenue growth, with China being the region leader.
Nike is a very competitive organization. Phil Knight (Founder and CEO) is often quoted as saying that 'Business is war without bullets.' Nike has a healthy dislike of is competitors. At the Atlanta Olympics, Reebok went to the expense of sponsoring the games. Nike did not. However Nike sponsored the top athletes and gained valuable coverage. Nike has no factories. It does not tie up cash in buildings and manufacturing workers. This makes a very lean organization. Nike is strong at research and development, as is evidenced by its evolving and innovative product range. They then manufacture wherever they can produce high quality product at the lowest possible price. If prices rise, and products can be made more cheaply elsewhere (to the same or better specification), Nike will move production. Nike is a global brand. It is the number one sports brand in the World. Its famous 'Swoosh' is instantly recognizable, and Phil Knight even has it tattooed on his ankle.
Weaknesses
The organization does have a diversified range of sports products. However, the income of the business is still heavily dependent upon its share of the footwear market. This may leave it vulnerable if for any reason its market share erodes. The retail sector is very price sensitive. Nike does have its own retailer in Nike Town. However, most of its income is derived from selling into retailers. Retailers tend to offer a very similar experience to the consumer. Can you tell one sports retailer from another? So margins tend to get squeezed as retailers try to pass some of the low price competition pressure onto Nike
Opportunities
Product development offers Nike many opportunities. The brand is fiercely defended by its owners whom truly believe that Nike is not a fashion brand. However, like it or not, consumers that wear Nike product do not always buy it to participate in sport. Some would argue that in youth culture especially, Nike is a fashion brand. This creates its own opportunities, since product could become unfashionable before it wears out i.e. consumers need to replace shoes. There is also the opportunity to develop products such as sport wear, sunglasses and jewelry. Such high value items do tend to have associated with them, high profits. The business could also be developed internationally, building upon its strong global brand recognition. There are many markets that have the disposable income to spend on high value sports goods. For example, emerging markets such as China and India have a new richer generation of consumers. There are also global marketing events that can be utilized to support the brand such as the World Cup (soccer) and The Olympics.
Threats
Nike is exposed to the international nature of trade. It buys and sells in different currencies and so costs and margins are not stable over long periods of time. Such an exposure could mean that Nike may be manufacturing and/or selling at a loss. This is an issue that faces all global brands. The market for sports shoes and garments is very competitive. The model developed by Phil Knight in his Stamford Business School days (high value branded product manufactured at a low cost) is now commonly used and to an extent is no longer a basis for sustainable competitive advantage. Competitors are developing alternative brands to take away Nike's market share. As discussed above in weaknesses, the retail sector is becoming price competitive. This ultimately means that consumers are shopping around for a better deal. So if one store charges a price for a pair of sports shoes, the consumer could go to the store along the street to compare prices for the exactly the same item, and buy the cheaper of the two. Such consumer price sensitivity is a potential external threat to Nike.
Political Risk
Sovereign governments have the right to regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways. Political risk can generally be understood as execution of political power that threatens a companys value. The simplest solution is to conduct a little research on the riskiness of a country, either by paying for reports from consultants that specialize in making these assessments or doing a little bit of research yourself, using the many free sources available on the internet. Then you will have the informed option to not set up operations in countries that are considered to be political risk hot spots. It can sometimes negotiate terms of compensation with the host country, so that there would be a legal basis for recourse in the event that something happens to disrupt the company's operations. However, the problem with this solution is that the legal system in the host country may not be as developed and foreigners rarely win cases against a host country. Even worse, a revolution could spawn a new government that does not honor the actions of the previous government. If Nike enters a country that is considered at risk, one of the better solutions is to purchase political risk insurance. It can go to one of the many organizations that specialize in selling
political risk insurance and purchase a policy that would compensate them if an adverse event occurred. Because premium rates depend on the country, the industry, the number of risks insured and other factors, the cost of doing business in one country may vary considerably compared to another. However, buying political risk insurance does not guarantee that a company will receive compensation immediately after an adverse event. Certain conditions, such as trying other channels for recourse and the degree to which the business was affected, must be met. Ultimately, it may have to wait months before any compensation is received.
investment in floating rate rather than fixed rate securities investing only in securities due to mature in the short term buying interest rate derivatives.
As a consumer products company Nike is exposed to consumers discretionary income which is correlated to market cyclicality and interest rates. Decreased consumer disposable income and sentiment has adversely affected Nikes performance during the global economic crisis. Negative macroeconomic events pose a significant threat to Nike. The capital structure remains the same for Nike under different scenarios because Nike historically has low levels of debt, and does not change its borrowing patterns under different market interest rates.
Accounting risk
In finance, for an outsourcing company, many of its problems have no domestic counterpart the payment of dividends in another currency, for example, or the need to shelter working capital from the risk of devaluation, risk of currency fluctuations, or the choices between owning and licensing.. The preparation of these financial statements requires making estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Economic and legal questions must be dealt with in drastically different ways. All this sums up to accounting risk for which Nike is no
different NIKE, Inc. is currently rated as having Average Accounting & Governance Risk (AGR). This places them in the 43rd percentile among all companies, indicating higher Accounting & Governance Risk (AGR) than 57% of companies. AGR scores are based on statistical analysis of
accounting and governance risk factors. Lower scores indicate heightened corporate integrity risk, indicating an increased likelihood of future class action litigation, material financial restatements or impaired equity performance.
Economic Risk
Economic risks can endanger the ability of a seller to get payment for goods or services in many ways. This type of risk can sometimes be forecast but is often completely out of the control of either the buyer or seller. Purchasing transaction insurance is essential for a buyer to minimize economic risk. Elements of economic risk include but are not limited to: 1. 2. 3. 4. 5. Convertibility risk Foreign exchange risk Translation risk Central bank activities (interest rate fluctuation, availability of funds) Economic indicator movement (GDP, unemployment, purchasing power, inflation, etc.).
1. Convertibility Risk
Convertibility risk is an issue when a buyer has received the goods promised and is now ready to make payment but cant because, for any number of possible reasons, the buyers government bars the conversion of its local currency to that of any other country. The reasons for this action could be a possible war, a major building infrastructure program, or a massive negative trade balance. The buyer naturally has the currency of his own country in his bank account. When the buyer goes to the bank to exchange the local currency to the currency specified in the purchase contract or to the currency of the sellers country or for that matter the currency of any hard currency country, the conversion cannot be made without proper authorization. Convertibility risks usually occur when the buyers currency does not have a ready world market. Although the transfer of the local currency out of the buyers country may not have been specifically barred, it provides little value since the seller may not be able to find a buyer for the funds.
AT NIKE : Strategy Nike diversifies its profit sources to hedge against currency risks. Nike has established multinational operations, so that one nation and currency cannot dominate earnings. Smaller investors can purchase shares within Nike to achieve diversification and hedge currency risks. Multinational also facilitates payments in the local currency to the local manufacturer and hence also guard against Covertibility Risks.
Specialties
Corporate Financial Risk Management
Introduced Trading Company to key corporate stakeholders in large presentations and to external business partners in international roadshows. Negotiated agreement between Nikes regional CFOs and the global product engines (Footwear, Apparel, Equipment) to change timelines for internal rate setting and allow for the transfer of FX risk from sourcing within a season to Nikes Treasury. Led three-week cross-functional process workshop to allow treasury functional experts to collaboratively interface with treasury business partners to develop new treasury processes for Nike under the Trading Company Program culminating in a 77 page document describing Treasurys future state; Collaborative and productive atmosphere of workshop was held out as exemplary by Nikes lean process organization for future workshop design. Developed concept (jointly with cross-functional trading company team) to compensate Nikes factories for changes in FX rates after pricing by paying in a single currency (usually USD) off an FX index
Coordinated Apparel sourcing, pricing, and IT functions, along with benchmarking against footwear experience, to work-through potential difficulties of changing vendor currency from EUR to TRY Worked with Demand Planning and BU finance functions to improve Purchasing Forecasts
3. Translation Risk
Translation risk involves the revaluation of foreign assets that are held in a foreign currency. There may be a difference in the current foreign exchange rate from the time of the original transaction to time of the fulfillment of the sales contract. Assets held on the balance sheet in foreign currency must periodically be revalued to the current market price of that currency. This kind of revaluation to the current market will create an exchange loss or gain. This exchange gain or loss is unrealized but still impacts the value of the assets held overseas. An example follows: Plant and equipment of an international company are marked to market at yearend for financial reporting purposes. Conditions throughout the year have caused a decline in the value of the
currency of their foreign holdings of 20%. This decline has the immediate affect of reducing the value of these assets by 20%, which then has the direct impact of reducing the companys profitability for the year by the same value even though no direct transaction has occurred other than the revaluation to create this loss. At NIKE: Specific to Nike, Nike has its manufacturing units in India, China, Bietnam and for few products in U.S. and the GDP growth and the market conditions of these markets are quite varied.
Hedging policies:
1) Nike uses Value-at-Risk (VaR) to monitor the foreign exchange risk of our foreign currency forward and foreign currency option derivative instruments. The VaR determines the maximum potential one-day loss in the fair value of these foreign exchange rate-sensitive financial instruments. While the total notional value of our foreign currency derivative instruments has declined since May 31, 2008, foreign currency volatilities have increased significantly and have resulted in an increased estimated maximum one-day loss in fair value of $61.8 million as of February 28, 2009 as compared to $34.9 million as of May 31, 2008. This hypothetical loss in fair value of our derivatives would be offset by increases in the value of the underlying transactions being hedged. 2) Nike maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in their Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the costbenefit relationship of possible controls and procedures .it carries out a variety of ongoing procedures under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures.
CONCLUSION
While most of these risks mentioned above have been eliminated in the derivative markets in which the trade takes place in organized exchanges, the risks of over-the-counter transactions remain fairly substantial worldwide. Furthermore, the greater interdependencies among various economic units and the increase in the use and abuse of derivatives as well as greater coordination of fiscal and monetary policies in the context of various treaties (i.e., European Union, North American Free Trade Agreement, Asian Free Trade Agreement, and Economic Cooperation of West African Economies) have created an environment in which a shock to a local economy can easily spread to other trading partners.