I, Applying Porter Model to explain why Nike manufactured in Asia.

Michael Porter, 1985 introduced value chain which provides a process of activiti es within an organisation. Porter classified value chain into two main groups: supported a ctivities and primary activities. (See appendix) Primary activities directly contribute to business s production or service. One of its main part, inbound logistics are the keeping of raw materials and their distribution to man ufacturing when necessary. When Nike operated in Asia, the inbound logistics could be enhanced b y minimizing shipping costs to store and reducing the response time. Whilst there were few re sources available in US during that time, the industries of textile and tanneries are plentiful in Asia. Apart from that, Nike outbound logistic activities were much concerned by the increase of s ubcontractor factories in more countries. It makes the distribution of products are easier an d cheaper. The supported activities linked to business infrastructure, human resource manag ement, technology development and procurement. Before starting to do the business in As ia, Nike found some shoes factories in Taiwanese and South Korea with wealthy families. Once th e new manufacturing was opened here, they will bring new managerial expertise with hig h production technology and design. Therefore, the technology development activity of Nike wo uld be extremely developed from these countries. By using potential sources of material s in Asia, Nike will get benefits in procurement activities. For example, they could bring these materials as soon as possible for Just-In-Time strategy to avoid redundancy of stocks in hand and sh ipping to wholesalers whenever they need. Moreover, the labour wages in developing countri es like Asia often lower than others. Daily wage per worker in Indonesia is around 1$ per day s in 1990s. It seems that the human resource management is much easier in these countries with low debate of money or higher position. In short, Nike resources remained unlimitedly and pote ntially so Knight made a decision to expand the firm s market to Asia in the late 1990s. In next part of report, five-force framework will be applied to Nike case in ord er to find out its opportunities and threats from the period from 1990 to 2000.

1b. Five force framework analysis Porter, 1980 introduced the five key aspects to set the position of organization in its environment as below: Threat of new entrants: It creates a barrier for existing term within the indust ry. The footwear market requires a huge working capital for various activities. Since 1992, Nike was considered as one of strongest brands over the world. The approval of difficulty market and Ni ke-strong brand had led to weak threat of new entrants. Thus, Nike could benefit from price-effe ctiveness, human resource advantages and customer loyalty. When the inflation has increased or activities cost rise, Nike could increase its selling price without fear of losing loyalty customers. In addition, the human resource capability and skills of workers could be closer to firm whilst there is less business within the market. The bargaining power of buyer: It s how customers bargain business activities. Nik e s annual revenue reached $2 billion in 1990s and closed to nearly 7 billions 7 years late r.( www.fundinguniverse.com) The figure illustrates a great amount of customers at t hat point. According to Nike s historical price look up, average closing price was 3.34$ in t he beginning to 1990, rapidly increased to 24.75$ in 2000. Customers are sensitive to pricing so they always

compare selling price with product s quality and service. Bargaining power of cust omer is, therefore, high. It may be sometimes threaten Nike in facing up with customer s co mpliance about quality of apparels, selling prices, after- sales service or business acti vities towards society. For example, the story in Life magazine newspaper, which criticized the use of c hild labour in Pakistan, might affect to customer s buying behavior. The threats of substitute products: The pressure from substitute products depend on 3 main factors: price of substitutes, quality or performance of substitute products and customer s whether buyers can switch into substitute products easily ( Strategic management , concept& cases, thommpson). In case of Nike, there are little alternative products for fo otwear so threat of substitutions is quite low. Not only it was a strong brand with high quality, bu t also Nike was succeeding in updating new design. Thus, Nike was attracted by most of customers . The weak threats of substitute products bring Nike some opportunities such as expanding t he market and increasing demand for innovative products. Bargaining power of suppliers: Since 1990s, Nike started to open new manufacture s in Asia. Thus, they had a new opportunity of accessing new materials. The resources of ma terial in these countries seemed potential at that point. Therefore, the organization has many c hoices to assess into essential materials. For example, the total value exported textile in Thail and during 1990s is 3.513 bil USD (sources: USDA/FAS,). Thus, the bargaining power of Nike supplier is low during period of 1990s and 2000. It will reduce the cost of raw materials and al so deliver price from these suppliers. As a result, the business profit could be maximization. Competitive rivalry: From 1990 to 2000, the two biggest competitors of Nike are Rebook and Adidas. The figure below shows worldwide market share of footwear industry from 1990 to 1999:

(sources: http://cbae.nmsu.edu) Nike dominated the market from early 1990 with total market share is much higher that its biggest competitors. However, Adidas and Rebook developed their brand and in crease its sales rapidly during the decade (http://www.adidas-group.com). Therefore, the ri valry among existing competitors of Nike was medium. They could face up with some thre ats and also opportunities. The domination of footwear market supported Nike to open the mark et, intensive innovation and new products development. In contrast, the existing firms could c reate some pressure in market share competition and initial innovation. Nike s benefits from international trade will be then taken into account on purpos e of allowing company find out their suitable strategies in global market.

1c. International trade benefits. Firstly, when Nike goes global, they will gain benefits from cost of products. T his costeffectiveness includes cost of labour, materials and transferring. For example, when Nike open new manufactures in Indonesia, they saved 7$ per worker per day compared to US o nes (Case research Journal, Anne T.Lawrence and Rebecca Morris, 2001). They also could eas ily access to materials in new land when the market is opened. Secondly, international trade e nhances the relationship between company and customers, keep it closer and adapt faster to c hange. The development of customer service centers quality and quantity will maintain a str ong connection between firm and their customers. Thirdly, the multiple production sites would s upport Nike to get tax exemptions and trade barrier avoidance from host countries. For example, foreign companies are exempted from Value Added Tax and Corporation Income Tax in Vietna m for 2 years from the beginning year of business (http://wiki.ibom.com.vn). The complex organizational procedures to open new manufacture will be also minimized. Lastly , the competition with other companies could improve the development of Nike s productio n technology and working processes. Every country has its own feature and advantag e so it s profitability when Nike goes globally. In Japan, the technology system is well d eveloped so the technology products are good quality here. Nike could apply this modern system i n their machines or computer systems. The advantages above had contributed to a huge mar ket share of Nike in global. After searching for Nike s external and internal environment, it seems easier to a pply Whittington s perspectives on strategy.

2a. Whittington s Systemic

and

Processual

Schools of Thought.

Strategic management is becoming more important for business construction. Espec ially, the changing in business environment could threat to organisation s stability. Whi ttington (2000) introduced four approaches to strategy which are classical approach, systemic ap proach, evolutionary approach and processual approach. Whilst planning are made through market changes adaptability in classical school, strategies must be updated daily to su rvive in unpredictable market in evolutionary school. Different from the two approaches, Whittington, 2000 mentioned: Processualist emphasis the sticky imperfect nature of all human life, pragmatically accommodating strategy to the fallible processes of both organizat ions and markets. Systemic approach is relativistic, regarding the ends and means of stra tegy as inescapably linked to the cultures and powers of the local social systems in whi ch it takes place Whittington noted that the main principle of processual is to accept unattainable ideal of rational fluid action and work with it. The Approach was laid by American Car negie School. It focused on the complexity within an organization. Under this school, the micr o-political view implies that firms not only made up of its single goals, but also different indi vidual s interests when they joint business goals together as pluralism. When more than one view po int involved in strategic, conflicts occurred and solutions must be recommended. For example, in healthy sector, the professional in different group had their own issues on preventing the human diseases, all have different wishes to support their ideas might lead to crisis in healthy imp rovement. Stacy (1996) recommended the integrated model of decision making and control which dea ls with dynamic troubles within an organization and base on degree of certainty or agree ment on the issue. The dynamic ranged from technically rational which issues seemed to be high level of certainty and agreement. In different ways, political decision making considered t he desirable issues are close to certainty but far from agreement. In contrast, judgmental dec ision making shows high level of agreement but low certainty of outcomes. The furthest point is the edge of chaos, management approaches seems ineffective. In short, the Processual approac h focuses on internal politics with the key processes are bargaining and influences on psycho logy.

The Systemic approach gives a strong idea about the business s interdependence on its social to carry out their plans and action effectively. The firms are different from the others, according to their social and economic systems. As whitley, 1991 mentioned: Diffe rent kinds of enterprise structures become feasible and successful in particular social contex t, especially where culture are homogeneous and share strong boundaries with nation states . The Viable System Model (VSM), Stafford Beer is an improvement of organization which based on system thinking. According to Stafford Beer, VSM was used as a conceptual tool to under stand the organization and support it to change. It consists of five key systems for an ef fective operation which are Implementation, Co-ordination, Control, Intelligence and Policy. Nowad ays, organization should not use the ordinary systems which carry out daily problem s olving to fit with business objectives. Stacy (1996) shows another aspect of strategy manageme nt which is extraordinary system-an understanding of business context, not just learning for better. According to Boisot(1995), the systemic perspective must be both codification and iffusion to make explicit and spread communication. Therefore, each subsystem of the busi ness could adapt its requirement from both internal and external.

2b: Selecting best perspective to Nike, from 1990 to 2000. In order to select the best relevant to Nike, it seems essential to figure out s hortly some main differences between systemic and processual school of thought which were id entified by Whittington. Whilst the processual school sees the market as irrationality, syst ematic one is totally different. Processual sees strategy as crafted which will be used in only em erging situation. In contrast, systemic are often embedded within the social system. Apart from that, processual approach concerns the political or cognitions bargaining process whil e systemic focus on external or societies such as its competitors. From 1990 to 2000, Nike had faced with various criticisms from public. In 1990, Harper s Margazine published that Nike just paid woman under 14 cents per hour whi lst product s price was extremely high. In 1995, according to Washington Post, they ha d to deal with problems between stakeholders: retailers, subcontractors, consumers and sha reholders. While a pair of Nike shoes was cost $70, labour cost and Nike profit were only $ 2.75 and $6.25 per one. The conflicts of profits held a dispute on interest sharing between sta keholders. During the period, a story in Life magazine also criticized the use of child labour in Pakistan subcontractor. It was not the end of public criticism, in 1996, CBS News 48 hour s stated a problem of working condition in Vietnam with low wage rates and physical abuse o f workers. The above evidence generated that Nike s strategies were not sociologically sensit ive. In systemic approach, strategies will be developed in complexity and culturally net works. In addition, the relationships in social structure at the system-level were not def ined. Their strategies were not long-term strategies, just acted in emerge. Therefore, proce ssual approach is best relevant and could be applied to Nike at this point. The perspective deals with politics or internal conflicts within organization. In 1995, the public criticism showed a e xtremely situation of conflict between Nike s stakeholders. Customers wished to pay lower cost of sho es whilst shareholders liked higher dividend. After all problems, Nike had to deal with ch ange emergently. That was the reason why they first introduced their Code of Conduct in 1992. Follo wing this, their subcontractors and suppliers must follow the local government labour regul ations and

environmental policies. It seemed close to certainty and agreement, however, the ir coordinator in Indonesia complained a lot on the new policy. The decision making is nearly clos e to Stacy s problem on decision making and control on the impact of pluralism. Stacy conside red this decision is political decision making and control . Reconsidering the coordinator s c omplaint, Nike hired Ernst & Young accounting firm in 1994 to audit their factories in Thail and and Vietnam. Therefore, they made an important change in reducing toxic, harmful che micals. personnel training about health& safety in the workplace. This decision of Nike made its strategy at high level certainty and agreement. In other words, they had made a technical rational decision making, according to Stacy s decision making identify. In short, processual school of thought is most relevant to Nike in the period fro m 1990 to 2000. Nike just set emerge strategies without focusing on long term ones. The refore, they must create some political compromises to deal with the conflicts. Two schools o f thought, Mintzberg will be then analyzed to make a comparison.

3a. Mintzberg cultural

and

environmental

schools of thought.

Henry Mintzberg had arranged strategy approaches into ten school of thoughts, ea ch had its own strategy characteristic toward organization. Two of these schools: cultur al school and environmental school are going to be taken into consideration. The main features o f each school will be introduced firstly before going on their differences and similari ties. Nowadays, culture within a business is necessary to preserve its own power and i magine. It groups individuals effectively into an organization. Mintzberg considered org anizational culture as key resource of competitive advantage. It also affects to business ch anges in decision making style or dominating the value of service, quality, and innovation and so on. Environmental school, on the other hand, Mintzberg, 1998 noticed that Environment al school first grew out of so-called: contingency theory, which described the relationshi ps between particular dimensions of the environment and specific attributes of the organiza tion . It means that, in contingency view, environmental reacts to the determinant of strategy f ormulation. In spite of different features, some similarities between them could be consider ed. Both of schools are more concerned with certain aspects in the strategy management proce ss. It encourages more experimentation and innovation within the business. In cultural school, business culture is put at the center to encourage key value, service, quality o r intellectual production. Moreover, the environmental changes will lead to business changes of strategy; bring to company more experiment and new perceptions. In addition, the two schools are vagueness, tends to describe what it is more than how to make a decision. However, they con tributed a lot to other schools and the business to attain its goals in the long term. Mintzberg had summarized some main differences between two schools in his book, Strategy Safari about their base disciplines, champions, leadership, and so on. Whilst ba se discipline of cultural school is anthropology, biology is considered in environmental school. The point of anthropology sees culture everywhere around people: the way individuals communic ate or react to others. In the population Ecology View, Freeman, 1997, the debate about capab ility and supply of resource decided the survival of an organization. Base on cultural, pe ople tends to be social, spiritual, and collectiveness. Mintzberg noticed a story in US automobil e industry, Whilst

Americans and European tried to compete with the other by re-inventing and imita ting, Japanese did the difference. They created their own way of producing automobile which is much suitable with their culture. In contrastthe winner of environmental school is population ecologists or organization theorists who take a great power to political or environmental fact ors. Moreover, culture had been considered as root of an organization. A big company had been s uccessful for a long time based on its own culture. Therefore, it seems difficult to change thei r style. Unlikely, the environmental school depend too much power on the external environment, the organizations always capitulated with problems rather than facing with it. 3b: Apply the best strategy development: school of thought to Nike between year 1996 and 2000 in term of

By expanding the sub- contractor network to new areas like Vietnam, Insonesia, T hailand and so on, it seems that they could not control all of manufactures. According t o the four dimensions of environment, Mintzberg, they are now entering period of market dive rsity . The market had ranged from integrated to diversified, led to some critical problems of business. In 1996, they were criticized for the working condition in Vietnam. In 1998, Nike h ad react its environment criticism by reducing exposure to toxics, substituting less harmful chemicals or installing ventilation systems in this country. According to Rebecca J.Morris and Anne T.Lawrence in their Case Research Journal , Nike had wished to participate in the Apparel Industry Partnership with the main aim of b reaking with the University of Oregon, building its own culture. That s the reason why organization joined White House Apparel Industry Partnership on Workplace Standard (AIP) which established by President Clinton. Its participants are Nike, Rebok, Liz Claiborne, labour Union s, retailers, wholesalers, and department store Unions. The participation of Nike and other me mberships in AIP could be considered as a process of culture clash , where different culture joi ned together to encourage their unique culture. The made an agreement on Workplace code of con duct to improve human working condition. Knight, president of firm stated that: Nike agre ed to participate in this group because it was the first credible attempt, by a divers e group of interest, to address the important issue of improving factory worldwide but equally importan t, we are finalling providing customers some guidance to counter all of the misinformation that has surrounded this issue for far too long The speech of Knight was seen as an emerge nt solution to show customers their unique culture and the ability to evaluate it. However, in July 1998, New York Times showed a problem in worker s rights to organize their independent union . Nike and other eight members established a new organization, called Fair Labour Associatio n (FLA) to deal with Workplace Code of Conduct. Many parties had benefited from association . Company could reserve their brand imagine, university could bring their students a belie f that the creation of their apparel logo is produced under condition of FLA. Conforming to Kogut an d Zander (1996), "Social community .become a moral order of people bounded by what they kno w and by what they value. This is rich culture, and it is what causes people to invent the brands that serve the organization well . Therefore, all the FLA members, including Nike was d oing well to create their rich culture . Unexpectedly some parties did not agree with that and c

reate the new

one: Worker Right Consortium which provide minimum standards for working condition s in factories. However, Knight disagreed with the association because he believed th at WRC was misguided, it s unable to setting standard or monitoring rules. The president want ed to ensure that only FLA should be kept going, as one main part to support Nike s culture. From the analysis above, it seems that cultural school of thought is best matche d to Nike from 1996 to 2000. They set strategies based on their own culture, by joining AIP and FLA. These associations bring Nike a good imagine in customers and other stakeholders view.