-
Corporate
structure
and
strategy:
the
case of Nike
(lecture prepared by Deron Ferguson,
Department of Geography; see sources in notes at
end)
Why are
contemporary corporations forced to restructure,
and how are they
doing it?
How is the structure of a corporation
related to its long-term competitive
strategy?
What
are the geographic implications of this
relationship with regard to
multinational corporations and
transnational production?
In today's lecture, we will address
these questions by looking
at the case
of Nike.
(
references for
this material
)
SETTING
THE
CONTEXT:
Post-Fordism,
Flexibility,
and
the
athletic
footwear industry
Before
looking
at
the
relationship
between
Nike's
corporate
structure
and
competitive strategy, it
will help to review the changing business
environment faced by large and small
firms alike. The changing business
environment
faced
by
firms
in
advanced
capitalist
economies
and
societies
is grounded in the
transition from Fordism to post-Fordism. The chart
below reviews the basic characteristics
of this transition.
Fordism
(post-WWII to mid 1970's)
?
?
large batches of standardized
goods
large inventories
Post-Fordism
decades)
?
small batches
of
nonstandardized
goods
?
deliveries of
materials
Labor
?
?
?
?
collective bargaining
(unions)
hierarchical management
rigidly defined job
descriptions
benefits between the state,
?
?
?
individual
contracts
multi-skilling (high
wage
jobs) and
de-skilling (low wage
jobs)
(past
two
Production
business, and labor
?
erosion of benefits
and the
growth of
Technology
?
?
inflexible machines
incremental
innovation
?
programmable
machines; CAD
systems
?
rapid and
radical
innovation
Government
?
macroeconomic
intervention
(
a
?
dismantling the
?
?
regulation of industry and
antitrust
industry-government-union
cooperation
?
?
deregulation
decreasing support for
unions
decline of the military
industrial complex
?
Consumption and
Markets
?
?
?
mass
consumption of
standardized
goods
relative
market stability
domination of international
markets
?
?
?
greater demand
for
high market volatility
intense international
competition
?
Corporate Structure
?
?
vertically integrated large
firms
rigid
corporate organization
vertically disintegrated
small and
medium-sized
firms
?
flexible
organization;
subcontracting
Location of
Production
?
corporate
functions (R&D,
production, marketing,
administration) located
together
?
corporate
functions
dispersed, e.g., R&D in
one place, production
in
another
?
regional
concentrations of
production
?
and agglomerations
(e.g., Silicon Valley..)
Buzzwords and
phrases
?
?
?
?
standardized; routinized
mass production
hierarchical
acquisitions and vertical
?
?
flexible
small batch
production;
time
integration
?
welfare state
?
?
?
distributed
neoliberalism
The general trend over the past two
decades has been a movement from a
Many exceptions can be found
to this conception of how economies are
changing (e.g., the recent acquisition
of McDonnell Douglas by Boeing),
but
elements of it can be found virtually everywhere,
depending on the
type of industry
involved.
In this example, we will
look at the athletic footwear industry. In
particular, we can focus on the
athletic footwear market as an example
of the formation of new, highly
volatile, competitive markets. Changes
in the footwear industry can be
summarized as:
?
?
?
?
?
?
footwear
production has grown rapidly //
Overhead
Fig 2
intense
competition and market volatility are indicated by
the explosion in the number
of
Overhead Fig 1
a key to success in the industry is
innovation and the rapid turn-around of design and
production
however, the production of shoes
remains inherently a
producers must have output and design
flexibility
producers must
preserve proprietary information and technology,
yet be organizationally
flexible
Nike
has
succeeded
in
competing
in
the
footwear
industry
with
the
following
strategy:
remain
flexible
in
a
volatile
market
by
using
subcontracting
relationships
overseas
in
low
labor-cost
countries.
NIKE'S STRUCTURE AND
STRATEGY
?
?
?
footwear
In 1970, as the athletic footwear
market grew, the Nike brand name was born
In order to gain greater
control over production and assembly, Nike opened
a plant in
New Hampshire in 1973 (which
it closed in 1986). The bulk of its production,
however,
has always been overseas
through subcontracting relationships of varying
loyalty and
intensity.
//
Overhead Fig 3
Today, 100% of Nike's production is by
subcontractors, or
type of
subcontracting relationships:
//
Overhead Fig 4
?
?
?
Developed partners:
These
production partnerships were first in Japan, but
are now in
Taiwan and South Korea).
These partners produce the
expensive
more likely to collaborate in
innovations with Nike, many are vertically
disintegrated
themselves,
subcontracting
local producers. Those
partners which produce solely for Nike receive
monthly orders
from Nike which don't
vary more than 20% to preserve production
stability.
Volume
partners:
These are large factories
producing large batches of standardized,
lower-priced footwear (70-85K pairs a
day). Production is routinized and serves multiple
(often more than 10) companies, other
than Nike (e.g., Reebok). These are
contractors--they absorb the market
risk associated with cyclical demand. These
factories are typically more vertically
integrated, owning their own leather tanneries and
rubber factories. They are not where
the most innovative or
produced, as
these factories produce for multiple companies;
for this reason,
relationships between
Nike and these companies are less loyal.
Developing
partners:
These factories are located
mostly in Thailand, Indonesia, and
China. These locations offer Nike very
low labor costs and a
costs in other
factories or exchange rate risk. These factories
are more loyal to Nike;
often they are
the product of a joint venture between Nike and
its developed partners in
Taiwan or
South Korea. Often, the joint investment into
these factories raises their ability
to
manufacture increasingly sophisticated products
more rapidly than if they were
producing unaided.
Why does Nike pursue this
organizational strategy?
?
?
?
Shoe production
is inherently labor intensive (although technology
can vary). Thus, labor
is an important
input for footwear producers to consider, but the
labor process remains
largely routine
in the assembly of shoe components.
Subcontracting relationships
provide organizational flexibility, moving market
risk to
partners, even though
production processes remain largely routine.
Southeast Asia offers
several locational advantages to Nike: i) it is a
rapidly growing
market; ii) low-wage,
investment and transnational production
by relaxing the enforcement of labor standards.
Key points to walk away
with..
The business
environment (that is, with respect to markets,
regulation,
competition, innovation)
sets the context in which corporations must
strategize
to
preserve
their
market
share
and
market
power.
This
strategy
involves a careful choice of how best
to
flexibly
structure the
firm's
organization
and
production,
in
which
geography
plays
an
important
role.
We
have
looked
closely
at
this
relationship--between
corporate
structure
and strategy--by looking at Nike. By
doing so, we have highlighted the
fundamental relationship between
geography, corporate structure and
strategy, and transnational production.