Written Case Analysis: Hitting the Wall: Nike and International Labor Practices

Stephanie Hodge BUSA 488 Creating and Managing Transnational Organizations Professor Thad Barnowe Spring 2009

Written Analysis February 18, 2009 Many companies today, in this growing world market, cannot be successful with out considering the benefits that could be gained by expanding their business, or part of their business, to other countries. As Bartlett, Ghoshal, and Beamish mention in the text there are three macro forces that drive, constrain, and shape the industries in which

companies will compete globally. (2008). Companies must prepare for these three macro forces in advance before entering into new countries to do business. If they dont prepare they will not be very successful in conducting business in another country and will not gain the competitive advantage they strived for when deciding to conduct business globally. Also, if a company does not enter the global market prepared they could run into problems that they did not foresee, which could result in damage to the company name and image, not only affecting international business but domestic business as well. This in turn could create the company to sustain profit losses and gain a tarnished reputation that they would have to fix to regain their competitive advantage and above average returns. In order to be a successful in operating in another country multinational enterprises must have a manager or a set of mangers to deal with three very complex external demands, cross-market integration, national responsiveness, and worldwide learning. (Bartlett et al, 2008). No matter what aspect attracts a company to another country whether it is, economies of scale, economies of scope, factor costs, or liberalization of world trade, the company must come into that global market aware of all the differences pertaining to the eight-facet model for analyzing country environments. The company needs to be aware of the differences between the home country and the host country, looking at the model these differences can include, physical, economic,

Written Analysis legal, political, sociocultural, labor, financial, and competitive. Nike is a prime example of a company that expanded their operations into a global market to gain a competitive advantage, and like some other companies did not fully understand the scope of the environment that they were moving into beforehand. Therefore, they did not fully anticipate the negative worldwide response that would be generated in reaction to the way they were conducting business in these developing countries. Along with this negative response came a decrease in sales, protesting from many consumers and organizations, and bad publicity from the media. Even though Nike is a large successful company with a sought after brand image, this error on their part of not moving into a country fully prepared equaled a recipe for disaster, and nearly cost the company their good reputation. Diagnosis

In this case we are presented with a multitude of problems relating to Nike and its choice to outsource all its manufacturing to developing countries, which they did to save on labor costs. Relating back to the text Nike made this move because of factor costs, which is a powerful driver of globalization. (Bartlett et al, 2008). With the innovation of technology and communication Nike is able to outsource a large part of their company, the manufacturing portion, out of their home country, and still get all the products shipped successfully to customers and retailers all around the world. However, in doing so Nike experienced some of the problems that the text mentioned might happen to companies outsourcing labor. One problem they ran into was that some of the developing countries that they were doing business in became richer causing the labor costs to rise, which the text said could happen as often as every five year. (Bartlett et al, 2008). This

Written Analysis led Nike to have to move their manufacturing from South Korea and Taiwan to more inexpensive plants in China and Indonesia. According to Bartlett et al, this can lead to greater costs, which can in turn outweigh the costs that the company was saving to begin with. (2008). The main reason Nike decided to outsource their manufacturing was

because with the money that they saved in labor they could dedicate more funds into their marketing campaigns. In addition, to saving on labor costs Nike was hoping to increase their competitive advantage and competitive positioning, by using independent contracting factories to manufacture their products. This great idea of outsourcing was one that Nikes CEO Phil Knight had come up with, however, it did not materialize into the success story that he thought it would. Nike chose to outsource to not only developing countries but to countries with very low costs. This meant that the average worker was making next to nothing to produce Nikes products compared to what it would cost Nike to produce their products in other areas of the world, let alone in their home country the U.S... As the case states they were mainly outsourcing to Indonesia, where wages were vary low and workers were docile. (Bartlett et al, 2008). Even though there were unions present and some protests, the Indonesian government was happy to host Nike. In this country the daily worker wage rate was between one and two dollars, compared to other developing countries Indonesia wages were about 50% less. Some organizations and consumers were outraged by Nikes labor practices, with media reporting on very low wages, child labor, unsafe working conditions, and extremely long working hours; Nike was faced with a public relations nightmare. Nike is a very successful company based on such a high brand image that one would think that they were doing everything right, but now they were

Written Analysis facing allegations of labor abuse. Instead of taking responsibility for wrong doing, and doing everything in the companys power to make the situation right and prove to the

public that everything was fine, Nike denied all accusations and insisted that the company could not be held responsible for the actions of the independent contractors. As the case states Nike at this point was its own worst enemy. Problems only got worse for Nike as a labor activist named Jeff Ballinger set out on a mission with Nike as his main target. He was determined to prove Nike was in the wrong and make them do something about it. With all the added negative media that was generated in response to these issues, Nike issued and employee Dusty Kidd to fix the problem by drafting up some regulations and a Code of Conduct for the companies contractors to operate by. However, after many failed attempts to patch things together and make things right with the media and the public, Nike was still seen as a company that did not care about their workers or their rights. This led to the companys first loss in 13 years and Nike was forced to issue a large layoff, in addition to profit losses Nikes brand image took a huge hit. Towards the end of the case Nike had come to terms and resolved some of the impeding problems, but they still never addressed the issue of the low wages and many critics did not believe that telling the full truth. In addition to this issue there could be future issues that could arise because of their questionable business practices, they could have a hard time obtaining celebrity spokespeople and/or sponsored sporting events, many college universities could not want to buy their sporting goods from them anymore, consumers could buy other brands like Reebok or Adidas, and stakeholders could not support the company. The main problem here is Nike needs to find a way to fix the current problem at hand, and learn what they can do in the future so

Written Analysis not to make the same mistake twice. Nike also needs to decide if they are going to continue to outsource their manufacturing to developing countries like Indonesia or if they are going to move manufacturing to their home country. Solution Generation There is nothing Nike can do at this point to go back and fix what has already happened. They need to address the wage issue and educate the public, as well as themselves, more about the countries that they are manufacturing in and how they differ from their own, from there they need to look ahead to the future and figure out a course of action so this type of incident never happens again. One of the biggest mistakes that

Nike made when dealing with the labor abuse situation, is in the instance when this issue was publicly brought to their attention and they were questioned about the overall manufacturing situation. Instead of addressing the problem that the pubic was so concerned about they decided the best thing to do was ignore the situation, or simply say that the issue was beyond their control. However, if they had done more company research on the countries that they were thinking about doing business in before they entered into them, they might have known some facts that they could have educated the public about, for example how the host country differs from the companys home country, as well as, other countries. They could have become more educated about the host country by appointing a team to conduct the eight-facet model for analyzing country environments as mentioned earlier. This would have given them more of an idea about Indonesias resources, income distribution, population, laws, government stability, attitudes, beliefs, religion, education, societal structure, composition of labor force, mobility, labor unions, and diversity. By conducting this research Nike might have been

Written Analysis able to find out the data that the Dartmouth students found, showing that economically companies like Nike were actually furthering progress in the developing countries, providing jobs and wages to people who formerly had neither. (Bartlett et al, 2008). Its facts like these that they could have used to formulate a data supported argument against the allegations that were made about the company. Another solution was one that was mentioned in the text, if a company plans to play the global chess game like Nike was trying to do, then they needed to make sure that they were managing their worldwide operations as independent units, which they were somewhat, but they also needed to make sure that they implemented a coordinated global strategy. (Bartlett et al, 2008). It seemed like Nike just wanted to outsource the manufacturing and not have to worry about it, they did not appoint a team to really

oversee the manufacturing process and left it up to the contractor to oversee the operation and how it functioned. This method of operation left Nike in the dark to what was really going on in the manufacturing plants and how they are treating their workers. This shows that Nike is not really functioning as a multinational corporation when it comes to their manufacturing operations; they need to employ a multinational management team that can work on meshing corporate strategy with the host country policies and practices, working closely with global operations instead of being more of a contractual based operation that never checks in on its operations. To become a multinational industry Nike needs to develop a more effective multinational strategy, which means that they need to be sensitive to the local markets and build strong resourceful national subsidiaries that will ultimately help generate the business to flourish. (Bartlett et al, 2008). From there they can strive to develop an international strategy, which I think that they have obtained

Written Analysis through their product sales, but they need to concentrate more on the way they run their business. In relation to Nikes manufacturing operations I kind of see their company as one that has moved from the more international perspective to a multinational perspective, but one that needs to move more into the global and transnational perspective. I do not think that their sales operation is in the same realm as their

manufacturing operations, I think this is more of an area that is overlooked, but they need to consider how they are going to achieve sales with the public viewing their company as one that is not operating under ethical and fair labor standards. However, if Nike worked under more of a global perspective with their manufacturing operations they would operate globally more as a single unit, instead of individual branches that are not overseen by the company itself. Nike needs to become better at managing their global operations they seem to be focusing too much on some aspects of the company while ignoring more of the important and key branches of their operations. Without a product Nike is not a company and no matter what type of marketing campaign they can not generate sales with a product that is tied to non-ethical labor practices. To insure that they have a good quality product Nike needs to make sure that the people making their products are well taken care off and are seen as important stakeholders in the company. To do this Nike needs to focus on developing more of a basic classic internationalization process approach, this is kind of going back to the basics but it insures that the company is in the process of increasing their commitment and understanding of the foreign markets that they do business in. They also need to focus on such underlying aspects as organizational complexity and diversity; they need to realize the issues that may arise when doing

Written Analysis business in another country and the sometimes complex demands across barriers of distance, time, language, and culture. (Bartlett et al, 2008). If they concentrate on these things in the beginning they are more prepared to deal with issues like bad publicity because they know the foreign environment and can develop an argument that shows facts that appose the accusations. Nike has a lot of work to do pertaining to their manufacturing operations, but they are a large successful company that will continue to prosper once these issues are addressed. Solution Choice and Implementation I do think that Nike should continue to do business in developing countries like Indonesia and use them as a resource for cheaper labor, but to do this successfully the company needs to develop more global awareness of their operations abroad. The solution that I would say would be the best one at this point is to admit their entire

wrongdoing in that they were not aware of their manufacturing operations problems, and they will do all they can to fix the problems. In addition, they need to go on to work with Indonesia to improve their economy and make working conditions better for all workers in the country. Nike started to take this route towards the end of the case but unlike Reebok they did not really act on the situation in a timely manner. However, the more involved Nike becomes in improving all working conditions around the world through direct investment and also involvement and donations to organizations, the better off Nike will be in regaining their brand image and good global corporate citizenship title. These actions in turn will lead to increased sales and profits that can be used to support the programs they are sponsoring. As a company they seemed to ignore the fact that good marketing can only go so far, and spending extra money in that department was maybe

Written Analysis 10 not needed. They needed to become more of a company that is moving toward the transnational perspective and one that is educated about all foreign environments that they do business in. As well as, a company that works closely with their contactors to make sure that the Nike Company upholds its commitment to all its stakeholders, and in doing this shows a high value and regard for their entire workforce. Overall, Nike needs to increase their global awareness beyond the cheap labor, to become a more committed company that understands and oversees all their operations domestically and globally, and by doing this they will move toward becoming a more successful global operation and will be viewed positively by consumers and the public alike. Nike needs to take many steps to implement this solution, but they are all steps that they company is very capable of doing. As mentioned above the first step is admitting that they were wrong and issuing a public apology. From this they need to announce that they plan on using a portion of their profits to develop a campaign that will be aimed at improving working conditions for the entire globe. They can develop their own organization to help this cause, and in addition to this they can support other organizations that support the cause. As they were starting to do in the case they need to become a company that supports laws and regulations that support fair treatment of workers. By doing this they are increasing the publics awareness that they are a company that cares about all mankind. In addition to these changes Nike needs to evaluate their current manufacturing operations, and improve on the situation. They have a few options here and all the options must be looked at and evaluated before they decide the best course of action. Before they can do all this Nike needs to appoint a team of employees and managers that

Written Analysis 11 are combined to create a global public relations/management team, instead of relying on one person like Dusty Kidd to deal with all the problems. This team needs to do all that it can in increase its global awareness of all the countries that Nike does business in, as well as oversee all the operations that take place globally. To do this the group needs to work on one of the important strategic tasks that the text mentioned is important in multinational enterprises. The task consists of all employees in this group being able to sense, respond, and even exploit the differences in the environments of the many different countries in which their company operates. (Bartlett et al, 2008). At the same time they can not become too intertwined in the global markets, they also need to reconnect with their local environments to insure good business practices, it is like a really big juggling act but the markets involved must be kept informed and happy. Overall, the team needs to become aware of all the cultural differences between countries to successfully deal with its customers as well as its workforce. After the team feels like it has a good grasp on the foreign countries it plans to do business in it needs to present to the heads of the company the pros and cons of outsourcing the manufacturing to contractors versus doing more of a direct investment approach, where Nike built manufacturing plants in developing countries to manufacture their products. I think that if they had done this in the beginning they would have gone into the situation more prepared, and would have been able to address the labor abuse situation and how to deal with it before it even happened. In my opinion Nike has two options right now, they need to either make sure that they are overseeing global contracting operations and make sure that they develop a standard of working conditions that are followed in all plants as well as offer incentives to workers that increase company moral, or they need to build and

Written Analysis 12 manage their own plants in a developing country of their choice. To be more cost efficient they should try to simply manage and oversee the outsourced operations, they could even do this by appointing an expatriate to move to the county that they are doing the manufacturing in to be the ears, eyes, and voice of the company and the values it upholds. Another step in the implementation of fixing these issues is to make sure that the company is working closely with the governmental demands of all the countries that it is working in. As the book mentioned this can be a sort of love hate relationship, but without managing these ties it can constrain the strategies of the company and take away from the companys competitive advantage. Nike needs to work with the Indonesian government to create a set of country wide working condition standards and then help them uphold these commitments to its workforce. At the same time they need to invest in the country in other ways to improve on their economy and overall state. By doing this they are evaluating the potential benefits that they can provide to the developing country by doing business in it, and from this they can try to improve the country gaining the respect from its people and all their consumers. All these decisions and plans for the future will be generated by this global task force department that is created, from here this group of people can help other departments like marketing and sales and public relations to insure their understanding of the other countries cultural differences and likes, dislikes, values and beliefs are known. This could in turn help these other departments improve on their marketing campaign by knowing what the global market wants, and the public relations department in regards to being able to defend the company and show detailed reports when accused of

Written Analysis 13 wrongdoing. If Nike concentrates on becoming a more of a transnational company for the future it will bring together the company globally to work as a whole eliminating the possibility of Nike getting left in the dark about portions of their operations. As Bartlett et al mentioned in the text, The winners in the emerging global competitive game are the companies that can most effectually harness their access to worldwide information and gain the expertise to develop and diffuse innovative products and processes on a worldwide basis. (2008, p.97). Nike needs to move towards this style of thinking to improve upon the current situation as well as ensure a bright future for the company.