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Jwi 531 - Financial Management 2

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Assignment 1: What’s It Worth?

Geoffrey K. Suber

Jack Welch Management Institute

Professor John Bennett

JWI 531: Financial Management II

Executive Summary

The following paper will review the Nike Corporation.  Nike is a major US footwear, clothing and sportswear supplier based in Beaverton, Oregon. The company operates in more than 160 countries and employs over 44,000 people across six continents. I find this small employment metric very impressive, as it shows the company thriving and seeking more opportunity outside of the U.S. This alone is a very key component to Nike’s competitive advantage over similar corporations in the same market. Competitive advantages, the Sellers Framework and Porter’s Five Forces theory relative to the company will all be discussed. A fundamental analysis of the Nike corporation including commentary about its stock value and fixed income status will be reviewed. Comments on how the company is performing and positioned relative to its competitors.

Introduction

Nike Corporation was founded in 1964 as a footwear distributor known as Blue Ribbon Sports by Bill Bowerman and Phil Knight. Initially, the company operated as a distributor for Onitsuka Tiger, the Japanese shoe maker. Most of the initial sales came out of the trunk of Phil Knight’s car. By 1967 selling shoes out of the trunk of his car turned into a retail store, Nike’s first ever. In 1972 new steps were taken to help Nike manufacture its own brand of athletic shoes and the “Swoosh” brand mark was created. The first self-manufactured company’s shoes used Bowerman’s “waffle” design. This design had special waffle-type nubs for traction and at the same time they were lighter than traditional athletic shoes. This creation propelled Nike into making and keeping the best technology shoes had to offer at the time. By 1979 Nike Air technology was successfully launched and by 1980 the company already attained more than 50% of the national athletic shoe market. Such creative innovations can propel any brand to the forefront of their respective market by keeping abreast of customer wants, putting out a quality or new innovative products, and simply by marketing the brand.

In 1982 Nike started to cooperate with Portland-based advertising agency Wieden+Kennedy. Many successful advertising campaigns were mutually launched and the agency’s co-founder Dan designed Nike’s famous slogan “Just Do It”

Competitive advantages

Porter’s five forces

        The five forces of supplier power, buyer power, substitutes, rivalry and threats of new entrants broadly impact the Nike corporation.

Threat of new entrants

 Nike is a profitable market that yields high returns. In turn this will attract new firms to the market. By so many new entrants flooding the same market as Nike this eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by Nike corporation, the abnormal profit rate will trend towards zero.

The following factors can influence how much of a threat new entrants may pose:

  • The existence of barriers to entry such as patents, and rights. The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.
  • Government policy
  • Capital requirements
  • Absolute cost
  • Cost disadvantages independent of size
  • Economies of scale
  • Economies of product differences
  • Product differentiation
  • Brand equity
  • Switching costs or sunk costs
  • Expected retaliation
  • Access to distribution
  • Customer loyalty to established brands
  • Industry profitability refers to the ability to make money in an industry which Nike is well ahead of due to them being an up and running corporation. Newer corporations like under Armor will seek industry profitability more than an established brand such as Nike.  

Threat of substitutes

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. For example, Reebok, and Adidas can be considered a substitute to Nike. Some factors when considering the threats of a substitute are:

  • Buyer propensity to substitute
  • Relative price performance of substitute
  • Buyer switching costs
  • Perceived level of product differentiation
  • Number of substitute products available in the market
  • Ease of substitution
  • Substandard product
  • Quality depreciation
  • Availability of close substitute

Bargaining power of customers

The bargaining power of customers are also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes. Firms can take measures to reduce buyer power, such as implementing a loyalty program. The buyer power is high if the buyer has many alternatives. The buyer power is low if they act independently. For example, if a large number of customers ask to make prices low, the company will have no other choice but to oblige due to the large number of customer’s pressure. Some potential factor that drive the bargaining power of customers are:

  • Buyer concentration to firm concentration ratio
  • Degree of dependency upon existing channels of distribution
  • Bargaining leverage, particularly in industries with high fixed costs
  • Buyer switching costs relative to firm switching costs
  • Buyer information availability
  • Force down prices
  • Availability of existing substitute products
  • Buyer price sensitivity
  • Differential advantage or the uniqueness of industry products
  • RFM Analysis or customer value
  • The total amount of trading

Bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services to the firm can be a source of power over the firm when there are few substitutes. If Nike needs a specific type of material for a new line of shoe and there is only one person who sells that material, you have no alternative but to buy it from the company that has the material you need. This is where suppliers can use their bargaining power to charge their price for materials or even refuse to work with Nike. Some potential factors that drive the bargaining power of suppliers are:

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