Company Analysis of Nike 2014 Essay

INTRODUCTION/ COMPANY BACKGROUND This report examines NIKE Inc. one of the leading sports brand in the world. It uses business analysis techniques such as SWOT, PESTEL, Porter’s five forces, and Ratio analysis to analyse the business environment and performance of this company. NIKE Inc. is one of the world’s biggest sporting brand based in Oregon USA. Founded in 1968, NIKE is the world’s biggest designer marketer and seller of athletic footwear, sports equipment, apparel, accessories and services, by sales revenue of $21.5 billion in 2012 (NIKE, 2013). With 48000 employees, NIKE’s operation cuts across different regions in the world including Canada, Asia, Latin America, Europe, and Africa. They posted revenue of $25313 million in the 2013 financial year ending May 2013, the company has enjoy growth in its revenue since 2010, and this trend is expected to continue as they leverage on top sporting events to boost their brand image (Tefris 2013). PESTEL ANALYSIS PESTEL (Political, Economic, Social, Technological Environment, and Legal) analysis is a business analysis technique that is used to analyse the growth potential of a company. It helps firms identify the environment in which they operate, and can firms predict future circumstances and situations by using information and data it provides (Yà ¼ksel, 2012). This report provides a PESTEL analysis of NIKE in the following paragraphs. Political Political environment have a huge implication on the micro and macro environment of a business, and they can significantly influence a range of business decisions (Leslie and Phillip, 2012). Political environment includes political system, government policies and other trade related regulations. Some of the political factors that can affect NIKE includes the relationship between USA (Nike’s country of origin) and other host countries where NIKE operates (for example China). For example increased tension between US and China can lead to certain aggressive policies that can affect the company’s operations in China. Furthermore recent pressure on US firms to keep jobs in the US can affect plans for future factory locations of NIKE. Economical The economic environment of the countries NIKE operate in is very vital to the overall strategy and decisions of the company. These factors include the state of the global economy, economic incentives from the countries where NIKE factories are cited, the general economic condition of these countries, inflation rates and changing oil prices. All of these factors can affect the revenue of the company, increased economic growth in emerging markets such as Brazil and China presented a huge revenue opportunity for the company, however recent decline in the growth of the Chinese economy will also have some negative impact of revenue projections of NIKE. Social Social factors can influence the business decisions of NIKE one way or the other. These factors includes tradition, customs, beliefs, level of education, corruption, customer’s consciousness, changing lifestyle, and income distribution (Singla, 2007). For example increased consciousness to maintain healthy living will lead to more demand for fitness centres and gyms that in turn could lead to more sales revenues for NIKE. Furthermore clamour for increased better welfare for workers in clothing factories in countries like China, Indonesia, and Bangladesh, and pressure from the civil society groups like Worker’s Right Consortium on companies like NIKE to ensure their suppliers follow health and safety standards are among some of the social situations and issues the company have to contend with. Technological The commercial success of NIKE’s product is based on technical innovation and quality control in the design and manufacturing process of footwear, athletic equipment, and apparel (Nike, 2014). For this reason changes in technological factors can have serious impact on the overall operations of the company. For example new technology can lead to new products, improve the manufacturing process, and improve the distribution network. This implies that the revenue of NIKE can increased, or there could be reduction in the cost of manufacturing due to better technology. To maintain competitive advantage the company need to constantly understand the technological factors that affect them. Environmental Business operations of firms such as NIKE can have huge impact on the environment. Factors such as climate change, waste management, water management, and use of hazardous chemicals are all environmental impact areas the company has identified. NIKE highlights its commitment to reducing the impact of the company’s operations through understanding how related these factors are, and how a coordinated approach in the design of its product and processes can mitigate the impact on the environment, and on their business. Legal The judicial system, consumer rights, trade treaties, and ethical codes are all legal factors that affect NIKE. Constant understanding of laws and regulations is imperative to avoid serious legal implication for the company. Gotham (2013) highlights that one serious legal related issue NIKE needs to constantly deal with is the issue of counterfeit product. Ensuring that fake NIKE products are not wide spread is necessary to keep the NIKE reputation, and avoid lawsuits that can increase the legal cost of the company. Furthermore, keeping ethical standards is very vital in protecting the NIKE brand. SWOT ANALYSIS SWOT is a management tool that is used to build strategic business plans (Amin et al, 2011). It is widely used in business due to its simplicity of its four factors (Strength, Weakness, Opportunity and Threats) and its flexibility (Al-Araki, 2013). The SWOT analysis of NIKE is presented in the next few paragraphs below. Strength One main strength of NIKE is its dominant position in the market, and the strong brand portfolio of the company. According to Forbes (2014a) NIKE’s market share in the global footwear market reached 18.6% in 2012, and it is expected to rise to 27% in the long run. The main source of value for NIKE are footwear and apparel that are sold under the NIKE brand, together they make approximately 70% of the overall value of NIKE (Trefis, 2014). This competitive brand portfolio of NIKE and the dominant position of the company  are key strengths that enables the company outperform the industry. Weakness Watts (2009) asserts that one of NIKE’s weakness is their inability to address problems linked to their labour and factory conditions. The company has been consistently criticised for its lack of control, and dependence on contractors and manufacturers that do not meet labour standard, safe factory conditions in Pakistan, Bangladesh, Indonesia, and China. This has caused to bad publicity for the company, and increased calls for product boycott in recent years. Furthermore the company’s focus on quality could be a potential weakness as it explore emerging market like Brazil, because its price points will be higher and some customers in these markets could lack the level of income to purchase their products. Opportunities Increased growth in emerging economies presents a huge expansion opportunity for NIKE. The company’s management believes there is high potential for their products in markets such as China, Brazil, and other emerging countries (Trefis, 2011). The growth these economies enjoy expands the global footwear market, and NIKE is in a strong position to tap into this growth opportunity. Furthermore the increasing use of multi-channel platforms such as online and mobile for shopping is an opportunity for NIKE to reach out to more customers worldwide. Threat The company’s main threat is its increasing competition, the intense competition and unpredicted changes in in technology and consumer preference in the industry NIKE operates presents a huge risk that can threaten the operations of the company (NIKE, 2013). Some of the main competitors that remain a threat to the company includes Adidas, Puma, and Under Amour. Furthermore, the strong brand value of NIKE products increases the risk of counterfeiting of their products. This is a constant threat the company needs to tackle to ensure it doesn’t lose brand value and revenues. PORTER’S FIVE FORCES ANALYSIS Porter’s five forces analysis helps firms to understand the competition and profitability in an industry, the framework includes potential entrants, industrial competitors, suppliers, buyers and substitutes. According to  Porter (2008) understanding the competitive forces, and their fundamental causes enables companies see the root of current profitability of an industry, while it provides framework that helps anticipate and influence competition over a period of time. The following paragraphs give analysis of the how these five forces influence the competition of NIKE. Potential Entrants Potential new entrants into the market can cause NIKE to lose market share, however in the current situation the risk of potential new entrant to NIKE is minimal because of the high entry barrier because of the established nature of the global sportswear industry. While the risk of new entrants is low, it should be noted that there is a risk of new entrant into NIKE’s existing product line, this can lead to loss of sales and revenue. The company needs to channel its energy into continuously expanding its market share through improving on existing products, and introducing innovative products that will enable them maintain their competitive advantage. Level of competition The level of competition in the global sport footwear and clothing industry is very high. NIKE faces stiff competition from other brands like Adidas and Puma. According to Forbes (2014b) the company faces tough competition in emerging markets and Western Europe, as rival brands like adidas increases their competitive campaign through lunch of products and other related activities aimed at gaining back lost market share. Furthermore, NIKE also faces competition from local brands like Li Ning as they expand to emerging markets like China. The company need to work very hard to continue to protect and expand its brand, for them to be able to maintain the dominant level they are presently. Bargaining Power of Suppliers Suppliers often determine the success of companies selling a product (Bode et al, 2011). However, the availability of commodity items like rubber, and cotton NIKE uses for the production of its goods, and the high amount of suppliers in the industry gives the company absolute advantage over its suppliers. NIKE can choose to switch to any supplier at any time with less cost implication, and low risk of disruption to it supplies due of its brand reputation. Furthermore, every supplier will want to do business with NIKE because of the huge manufacturing ability of the firm. This gives NIKE power over its suppliers, and guarantee of steady supplies. Bargaining Power of customers The loyalty of customers to NIKE brand gives the company bargaining power over its customers. NIKE can decide to set its prices at high levels because it knows customers are willing to pay to be identified with its brand. As long as the company continues offer products that are innovative and appealing to its customers, the company will continue to maintain it strong position, and attract more customer loyalty (Lussier and Kimball, 2014). The bargaining power the company has over its customers gives them a great deal of flexibility in their pricing. Threat of Substitutes There is a high tendency for customers to substitute NIKE products for other brands when they face squeeze in their income during economic downturn. This is due to the fact that NIKE product are considered pricey can could be considered luxury product among certain middle class families if there is a squeeze on their disposable income. Competitors can capitalise on this to release cheaper products that will be appealing to these customer during economic slowdown, therefore NIKE need to constantly monitor the overall economic wellbeing of its customers before introducing any product. ANALYSIS OF NIKE FINANCAL RATIO *Extracted data Ratios Formula 2013 2012 2011 Asset Turnover Ratio Revenue/Total Assets 1.44 1.51 1.39 Return on Assets(ROA) Net Income/Total Assets 14.13% 14.37% 14.22% Return on Equity(ROE) Net Income/Equity 22.28% 21.41% 21.67% Gross Profit Margin (Revenue-COGS)/Revenue 43.59% 43.50% 45.58% Quick Ratio (CA – Inv.) / CL 2.60 2.22 2.19 Current Ratio CA/CL 3.47 3.05 2.85 Debt Ratio Total Debt/Total Asset 7.89% 2.49% 4.42% Debt to Equity Total Debt/Total Equity 12.44% 3.71% 6.74% Inventory Turnover COGS/ Inventory 4.16 4.09 4.35 Receivables Turnover Revenue/Receivables 8.12 7.45 6.65 *P/E Ratio 22.90 22.40 18.90 *EPS 2.71 2.37 2.20 Nike’s revenue increase by approximately 8% in 2013 from 2012 figures, looking at the profitability ratios in the table above, it can be observed that the company’s profit margin reduced from 45.89% to 43.50% in 2012 and slightly increased later in 2013 to 43.59%. The gross profit margin is a reflection what is left after the cost of production is deducted, other profitability ratios such as ROE also shows upward trend from 2011 to 2013 indicating a favourable year for the company compared to its 2012 figures. This according Forbes (2014a), and NIKE was as a result of pricing actions, and reduce cost of material such as cotton, and lower investment activities by the company in 2013. The asset turnover of the company reduced in 2013 compared to 2012, this could be attributed to the fall in sales in China one of the biggest market for the company. Furthermore, looking at the liquidity ratio of the company, it can be observed that its current and quick ratio  have been i ncreasing within the period under review. For 2013 quick ratio was 2.60times an increase from 2.22times in 2011, this is well above the industry average which is currently at 0.77times. The current ratio of the company has also been increasing in the years under review, this reflects a strong financial position for the firm because it indicates that the company will be able to meet up future debt obligations. Other solvency ratios such as debt ratio and debt to equity ratio saw a high increase from 2.49% and 3.71% in 2012 to 7.89% and 12.44% respectively. This is an indication that the company relies on debt to fund its assets, this can be due to the strong liquidity position of the company which is reflected in its quick and current ratios. The company has the ability to meets its debt obligations so the risk of using debt of using debt is low. Finally from the efficiency ratios it can be observed that the inventory turnover for the company reduced from 4.35times to 4.09times in 2012, and later rose slightly to 4.16times in 2013. This indicates that the company is still slow in the number of times its inventories is sold and replaced compared to the 2011 figure. This could be as a result of the slow recovery of most countries coming out of recession, and slow growth in key markets for NIKE. However this is not a problem peculiar to NIKE, and the company is still above the industry average of 3.6times. The receivable turnover of the company has been increasing within 2011 and 2013, it is possible that this also adds to the increasing liquidity position of the company. The EPS of the company has observed an upward trend from $2.20 in 2011 to $2.71 in 2013, also its P/E ratio also increased 18.90% to 22.90% this is an indication of NIKE’s profitability within these years and it reflects NIKE’s strong position among the investing community. The increasing P/E ratio of NIKE also indicates investors’ confidence in NIKE’s future earnings and the growth prospect of the company. In conclusion, from the analysis of NIKE financials it is evident that the company maintains a strong position in the industry, because of its inc reasing revenue despite slight drop in certain emerging market, its liquidity position is strong compared to industry average and their growth prospect is also high as reflected in their growth ratios. ANALYSIS OF SHARE PERFORMANCE Figure : Movement of Nike share price in the past 6 months. The figure above presents the share performance of NIKE for the past 6 months, from the figure it could be observed that in the third quarter of NIKE’s financial 2013 year ending May 2014, the share price of the company observed a sharp drop to $70.51, then rose to $79.64 reaching its peak in the period under review. The share price dropped to $73.2 and since then have been fluctuating within 70 and $71. According to NIKE (2013) fluctuations in NIKE share prices can be attributed to various factors that affects performance in these quarter, they include the seasonality of its products, general economic condition, weather condition, and changes in consumer preference. However, dividend pay-out announcements, expectations of quarterly results and other industry related factors could also lead to the fluctuations of NIKE share price. Overall NIKE’s share performance has been fairly stable at $70-$80 as no highly significant drop have been observed in the period under revie w. CONCLUSION In conclusion, the analysis of NIKE indicates that it remains one of the biggest sports manufacturing brands in the world. The company’s focus on manufacturing innovative products has kept them in a very strong position in the sportswear and clothing industry. 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