Nike Using Outsourced Labor and the Effects on Their Prices

Nike was created in 1962 by Bill Bowerman and Phil Knight. The founder’s goal was to create an affordable shoe with a high-quality feel. Bill Bowerman and Phil Knight’s focus was athletic footwear, but as the company grew, they soon saw the opportunity to expand their company to create a wider profit margin[1]. Many major companies have been searching for “flexibility” which means “downsizing, outsourcing” and expanding networks[2].  The reason behind flexibility is the ability to decrease the production cost which allows for an increase in revenue; flexibility helps major companies to grow at an increasing rate. Even though Nike is registered as an “American Corporation” not a single shoe is assembled in the United States[3]. Nike uses outsourced labor because it is closer to the raw materials Nike uses and it lowers the cost of production which allows for a wider profit margin.

Nike’s company is broken down into two levels: “core” (developing partners and sources) and “sources for material, components, and subassembly” (manufacturing)[4]. The “core” level involves those who oversee designs, testing products, and everything within production, as well as “producers” housed in Thailand, Indonesia, and China. “Core” level is usually hired by Nike and is in close contact with the Research and Develop Team in Oregon. The second level, “Sources for Material,” consists of foreign partners who run Nike’s facilities and manufacture Nike’s shoes. Nike’s production network has grown tremendously since the 1970s, but Nike has had many backlashes from expansions. For instance, the newer facilities attracted bad publicity because Nike’s failed to meet United States standards for labor protocol[5].  Nike saw this bad situation as a way to be a leader or a “corporate example” for other major businesses to follow. It was handling a bad situation and be able to receive free positive publicity. There were policies put in place to ensure the safety of facility workers and the environment. A couple of the policies were: “Adopting U.S. Occupational Safety and Health Administration (OSHA)” this policy put regulation for indoor air quality for all Nike’s facilities and funding and researching global issues from business practices such as air quality standards around plants and facilities[6].

Nike is known for using outsourced labor, and there was even evidence that Nike’s facilities had children working there. The question is why, why does Nike use cheap labor. All of Nike’s facilities are located relatively close to the raw materials used to make Nike’s Shoes. Since the facilities are close to the raw materials, then the cost of transporting the articles is meager. All of Nike’s facilities are located further away from the consumers which result in a higher distribution cost. The production cost savings are more significant than the production cost itself due to the location of the facilities which allows for a higher profit margin[7].

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Even though Nike is one of the biggest athletic companies, they are regularly looked down on due to the treatment and wages for foreign workers. Many of these outsource facilities are in China, Vietnam, Pakistan, and Indonesia. Within these facilities, Nike hires people from the perspective country to operate and adequately run the facility, but this doesn’t always work out in the best manner. There have been many reports of abusive behavior to the employees[8], some of Nike’s facilities were caught using child labor, and the wages were extremely low[9]. Once the media found out Nike was put under fire and cause a major downfall economically speaking. The once high demand for Nike’s shoes soon decreased at a steep rate. Nike has to fix the issues they started because if Nike had not their brand may not be what it is today. For instance, Nike had to look at what their consumers wanted to see since Nike is producing is solely for the consumers, and then follow through to ensure that Nike did not lose any more buyers[10].

 Since 1998 Nike has raised worker’s wages by 40 percent. Majority of Nike’s workers used to be in Indonesia, but Nike is always looking for cheaper labor. In Indonesia, the monthly wages went from “200,000 rupiahs”, roughly $18, to “250,000 rupiahs”, roughly $23. To live a below average lifestyle in Indonesia workers need at a minimum of “350,000 rupiahs”. Some studies claim this monthly payment is more than enough for workers to live off of; if this was true, why are the majority of these workers live in extreme poverty[11] Nike makes about “$9.6 billion” of revenue in a year and spends close to “$1 billion” for advertising in a year. Within the advertising budget “less than 2 percent” would raise Indonesian worker’s wages nearly double. The idea of increasing Indonesian worker’s wages was addressed to Nike’s “shareholders,” and it was rejected. Phil Knight, former Nike Chairman, made “$1.7 million” in a year and that is equivalent “52,000 times” more the average wages of an Indonesian worker[12]

Taking a look at a basic pair of sneakers that the market price is $100 on average is cost $28.50 (57 percent) to produce these shoes. Within the production cost, there are three critical components of this production cost. The factory and labor cost which equals $25, shipping which is equivalent to $1, and duty which is usually ten percent of the factory and labor cost equivalent to $2.50[13]. Sneaker companies spend $15 (30 percent) on “selling, general, and administrative expenses” which is everything not included in the production cost, taxes which equals to $2 (4 percent), and net profit of $4.50 (9 percent). All of the percentages of the prices added equals to 100 percent of the revenue this means when Nike sells the shoes to wholesalers for $50 and then the wholesalers, or also known as retailers, mark up the shoes 100 percent to generate a profit[14] In Figure 1 it shows the break down of all components that lead to the market price. This is the break down of all elements of the production cost for an average pair of sneakers.

 Nike has an interesting pricing strategy where they focus on the higher end market while increasing the market share in lower and middle range prices to broaden Nike’s product spectrum. The growing demand for more economical and average prices is a relatively new component for Nike’s pricing strategy since it caused a weak point in their business allowing room for other competitors to steal Nike’s consumers[15]. Another factor that has changed their pricing strategy tremendously was Nike allowing their retailers to advertise 25 percent off of anything. Nike only allowed retailers 25 percent off for a certain amount of weekends[16]. This creates a massive momentum for previous consumers to come back to Nike due to the low prices, but once consumers are used to buying Nike products at a discounted price, they will not want to go back to the original prices. Unlimited 25 percent discounts will drive up sales in the short run, but it will affect the health of the company in the long term. The reason it will affect the companies health in the future is because high discounts will make it hard for the original prices to go up.

  In 2017, Nike was able to rely less on discounts because they were able to come out with new products which allowed them to demand the prices the products were marketed for. Nike was able to use their “brand identity” to help increase their pricing power[17]. For instance, Nike partnered with Lebron James and the National Basketball Association to allow fans to have exclusive deals when they buy jerseys. This allows for more people to become engaged with Nike’s online store and to spread the word about Nike. Nike wants to bring the company right to the hands of the buyer and the easiest way is via online shopping[18]. Online shopping has helped increased Nike’s total sales because it is easy to find a style the consumer likes and they do not have to hunt for the specific style or size in stores. Nike’s marketing strategy has had to change over time to keep up with the ever-changing technology such as the decrease of in-store shopping, malls or Sports Authority, and an increase of online shopping, Nike.com or any retailers’ websites.

Figure 2 shows the yearly revenue of Nike

 The figure above shows the yearly revenue and expenses of Nike. This indicates how cheap labor and low production cost help increase gross profit. Once you take a closer look, you can tell that there is plenty of room to increase many of Nike worker’s salaries and even help give back to different communities around the world and help fundraise to slow down global warming. Nike could also set price ceilings on their products to ensure that it will be available to everyone, but that would not allow Nike to be able to maximize their profit margins and be able to keep expanding their company[19].

In conclusion, Nike uses outsources labor to increase its profit margin while maintaining a low production cost. This allows Nike to be able to have more control over their prices and always changing up their pricing strategy to help better Nike. Even though Nike has made some significant mistakes, they have learned from it and created a new standard for athletic companies globally. Nike may be separated into two levels both now work together as a seamless machine because Nike realized they have to treat all employees equally even if they are outsourced.

Bibliography

• Carlozo, L. (1998, Dec 15). IF THE SHOE FITS (YOU STILL MIGHT NOT WANT TO WEAR IT) CRITICS KNOCK NIKE’S LABOR PRACTICES. Chicago Tribune Retrieved from https://0-explore-proquest-com.libcat.sanjac.edu/docview/418758987?accountid=7167
• Enderle, Kim, et al. “Strategic Analysis of Nike.” Strategic Analysis of Nike, Inc, DePaul University, 14 Mar. 2000, condor.depaul.edu/aalmaney/StrategicAnalysisofNike.htm  
• Harrison, Bennett. 1994. “The Dark Side of Flexible Production.” Technology Review Vol. 97, Issue 4, Page 3-7. DOI: 10.1002.
• Kish, Matthew. “The Cost Breakdown of a $100 Pair of Sneakers.” Bizjournals.com, Portland Business Journal, 16 Dec. 2014, www.bizjournals.com/portland/blog/threads_and_laces/2014/12/the-cost-breakdown-of-a-100-pair-of-sneakers.html?s=image_gallery. Pages 1
• Kish, Matthew. “New Nike Pricing Strategy Worries Analysts.” Bizjournals.com. 2017. Accessed March 22, 2019. https://www.bizjournals.com/portland/news/2017/04/20/new-nike-pricing-strategy-worries-analysts.html
• Lutz, Ashley. “How Nike Shed Its Sweatshop Image to Dominate the Shoe Industry.” Business Insider, Business Insider, 6 June 2015, www.businessinsider.com/how-nike-fixed-its-sweatshop-image-2015-6.
• “NKE Key Financial Ratios.” NASDAQ.com, 2 May 2019, www.nasdaq.com/symbol/nke/financials?query=ratios.
• Ratner, J. (2017, Oct 30). Nike has a new playbook. National Post Retrieved from https://0-explore-proquest-com.libcat.sanjac.edu/docview/1957650156?accountid=7167
• Sonoenshine, Jacob. “Nike Is Winning over New Customers and It Could ‘dramatically Increase Prices’ (NKE) | Markets Insider.” Business Insider. 2018. Accessed March 22, 2019. https://markets.businessinsider.com/news/stocks/nike-stock-price-winning-customers-could-dramatically-increase-prices-2018-6-1027308709

[1] Enderle, Kim, et al. “Strategic Analysis of Nike.” Strategic Analysis of Nike, Inc, DePaul University, 14 Mar. 2000, condor.depaul.edu/aalmaney/StrategicAnalysisofNike.htm. Pages 4-6.

[2] Harrison, Bennett. 1994. “The Dark Side of Flexible Production.” Technology Review Vol. 97, Issue 4, Page 2. DOI: 10.1002.

[3] Harrison, 4

[4] Harrison, 4

[5] Enderle, Kim, et al. “Strategic Analysis of Nike.” Strategic Analysis of Nike, Inc, DePaul University, 14 Mar. 2000, condor.depaul.edu/aalmaney/StrategicAnalysisofNike.htm. Pages 17.

[6]Enderle, Kim, et al., 17

[7] Enderle, Kim, et al., 17

[8] Lutz, Ashley. “How Nike Shed Its Sweatshop Image to Dominate the Shoe Industry.” Business Insider, Business Insider, 6 June 2015, www.businessinsider.com/how-nike-fixed-its-sweatshop-image-2015-6.

[9] Carlozo, L. (1998, Dec 15). IF THE SHOE FITS (YOU STILL MIGHT NOT WANT TO WEAR IT) CRITICS KNOCK NIKE’S LABOR PRACTICES. Chicago Tribune Retrieved from https://0-explore-proquest-com.libcat.sanjac.edu/docview/418758987?accountid=7167

[10]  Lutz, Ashley. “How Nike Shed Its Sweatshop Image to Dominate the Shoe Industry.” Business Insider, Business Insider, 6 June 2015, www.businessinsider.com/how-nike-fixed-its-sweatshop-image-2015-6.

[11]  Carlozo, 2

[12] Carlozo, L. (1998, Dec 15). IF THE SHOE FITS (YOU STILL MIGHT NOT WANT TO WEAR IT) CRITICS KNOCK NIKE’S LABOR PRACTICES. Chicago Tribune Retrieved from https://0-explore-proquest-com.libcat.sanjac.edu/docview/418758987?accountid=7167

[13] Kish, Matthew. “The Cost Breakdown of a $100 Pair of Sneakers.” Bizjournals.com, Portland Business Journal, 16 Dec. 2014, www.bizjournals.com/portland/blog/threads_and_laces/2014/12/the-cost-breakdown-of-a-100-pair-of-sneakers.html?s=image_gallery. Pages 1

[14] Kish, Matthew. “The Cost Breakdown of a $100 Pair of Sneakers.” Bizjournals.com, Portland Business Journal, 16 Dec. 2014, www.bizjournals.com/portland/blog/threads_and_laces/2014/12/the-cost-breakdown-of-a-100-pair-of-sneakers.html?s=image_gallery. Pages 1

[15] Lutz, Ashley. “How Nike Shed Its Sweatshop Image to Dominate the Shoe Industry.” Business Insider, Business Insider, 6 June 2015, www.businessinsider.com/how-nike-fixed-its-sweatshop-image-2015-6.

[16] Kish, Matthew. “New Nike Pricing Strategy Worries Analysts.” Bizjournals.com. 2017. Accessed March 22, 2019. https://www.bizjournals.com/portland/news/2017/04/20/new-nike-pricing-strategy-worries-analysts.html

[17] Sonoenshine, Jacob. “Nike Is Winning over New Customers and It Could ‘dramatically Increase Prices’ (NKE) | Markets Insider.” Business Insider. 2018. Accessed March 22, 2019. https://markets.businessinsider.com/news/stocks/nike-stock-price-winning-customers-could-dramatically-increase-prices-2018-6-1027308709. Page 1

[18] Sonoenshine, Jacob. “Nike Is Winning over New Customers and It Could ‘dramatically Increase Prices’ (NKE) | Markets Insider.” Business Insider. 2018. Accessed March 22, 2019. https://markets.businessinsider.com/news/stocks/nike-stock-price-winning-customers-could-dramatically-increase-prices-2018-6-1027308709. Page 1

[19] Enderle, Kim, et al. “Strategic Analysis of Nike.” Strategic Analysis of Nike, Inc, DePaul University, 14 Mar. 2000, condor.depaul.edu/aalmaney/StrategicAnalysisofNike.htm