Corporations

Starbucks is that rare business story, a company that has single-handedly brought life to an old commodity and established anew. Thirty-three years ago few US consumers drank premium coffees like lattes, and espressos let alone pronounced them correctly; today millions do. It is all part of a coffee trend that Starbucks largely started. More than a fad product, an entirely new food ‘agenda’ is taking shape. Starbucks has had great success in developing its company. Unlike many traditional consumer companies, such as Proctor & Gamble, Starbucks did not develop its name through the supermarket. Rather, Starbucks grew its reputation through company owned retail outlets.

These outlets, which combine company standards of design with location-specific tailoring. are the engines that have powered Starbucks growth. Starbucks first store was opened in 1971 at a waterfront in Pike’s Place. This tiny Seattle based chain with innovative ideas of how to do business exploded in a few years and has changed the process of drinking coffee not only in US but worldwide. Starbucks has since exploded turning coffee shops into a global trend.

According to figures found on starbucks.com, there were one hundred and sixteen Starbucks in the country in 1991, and then by 1996, there were one thousand fifteen. As of today, they now have over 8,000 stores in numerous different countries in every hemisphere, all for the purpose of serving the best quality coffee and products. With so many company owned stores across the world and with the intention yet of increasing, the company has transformed coffee into a lifestyle accessory with as much elegance as the latest fashion trend.

Starbucks Coffee is an example of a successful international launch of a U.S. business. Howard Shultz CEO, and writer of, ‘Pour your Heart into it’, says ‘since our first international store opened in Japan in August 1996, we have demonstrated the power of the Starbucks brand and the relevancy of our in-store experience to consumers worldwide. He also said, We embarked on a growth plan to build a global company and today we are recognized as one of the leading brands worldwide. Starbucks success was built on two things:

1. the store experience (Starbucks’ image)
2. the quality of its products

Which consumers believe “really is a better cup of coffee”. As it has grown the company has reported years of revenue growth of over 50%. Starbucks Coffee is a part of an American culture that has proven not only to be a successful company, but also one of great morals and business ethics. Starbucks made coffee not only ‘cool’ but created an immensely successful business. Starbucks success was not always so easy. Back in the 70’s, there were no signs of coffee as a strong business. Coffee consumption in the US peaked in the 1960s, but by 1971 was on a steady decline.

Following price fluctuations in the 1950s and 60s, several quotas for how much coffee was to be produced were set. These quotas helped keep prices stable and sufficient to cover producer’s costs of production and living. “The value of retail sales of coffee has doubled since the early 1990s from US$30 billion to US$65 billion although producers have seen their share of retail sales during the same time period halve from around US$12 billion to US$5.5 billion. For small farmers declining prices have a direct impact on overall household revenues and access to basic needs”

Nowadays, Starbucks is becoming less of treat for US consumers and more of a everyday staple. Starbucks sells more than just coffee; Bottled frappuccino which is a joint venture with PepsiCo, and Dreyers, (Starbucks-branded ice cream) have done exceptionally well in supermarkets. Ice-cream represents an additional potential of $40 million. Having Pepsi and Dreyers as joint partners will enable rapid supermarket penetration. They have contracts with many big name businesses like United Airlines, Kraft, Marriott, Albertsons, and many other miscellaneous companies to expand their distribution of coffee, and products to all that seek them.

You can find the Starbucks coffee brand being served on most airline flights, Barnes n’ Nobles bookstores, and in Hotel rooms worldwide. Retail outlets currently continue to offer baked goods, confections, and coffee-related equipment and merchandise–much of which is carried through its online store and mail order brochures. In fact, they have never done classic advertisement, such as billboards, TV, or radio ads, but still manage to be among the top 100 brands worldwide. The wide varieties and quality of Starbucks coffee’s and products has contributed widely to their thirty three years of success in which they have managed to attract a great number of loyal consumers. Finally, rather than franchising stores, Starbucks owns all their locations.

Starbucks strives on keeping not only customers happy but their employees as well. Shultz’s early on dedication to “employee happiness as an integral part in keeping good, quality, long lasting employees” proved to be successful in all these aspects. “People try to classify us as a restaurant company or a specialty coffee company, but that focus is just too narrow. It’s important to recognize that what we have built is one of the most powerful consumer brands in North America.”- Starbucks Chairman and CEO Howard Shultz in an interview with Nations Restaurant News.”

Top management at Starbucks believes that employees make the store that they work in. They have proved to be successful with the approach to employees with turn over rates reported as “lower than industry average”. A Starbucks employee needed to be very knowledgeable, communicative, and helpful to the customers. Starbucks uses strong cultural incentives to drive the identification of opportunities. In the book, Mission statement #2 in his reads: “Provide a great work environment and treat each other with respect. They provide things like health insurance and stock options to all of their staff, regardless of how much time they put in and/or if they are part time employees, which is very uncommon nowadays.

These programs have made Starbucks one of Fortune’s ‘100 best companies to work for. They have received numerous awards for company growth. Starbucks promotes internal promotions and continues to encourage employees to speak out about ideas they may have while providing incentives. At Starbucks all employees are called “partners,” signaling a level of responsibility maintained by few companies with sales in the billions of dollars. Anyone who has an idea uses a one-page form to pass it to the senior executive team–and gets a response. When the company pursues an idea, its author, regardless of tenure or title, is typically invited to join the launch team as a full-time member.

New-style marketing organizations, by contrast, hire marketers not for jobs but for two broad kinds of roles: those of integrators and specialists. Integrators are marketers with broad skills who coordinate the delivery of products and services to the market from beginning to end. Specialists–more narrowly focused marketers with specialized skills–can be mobilized quickly to provide the particular expertise a given opportunity team requires. Starbucks is one of them and finding its way of capturing the market it will surely pay high attention to the recruitment process.

Social Responsibility, charities, foundations, and community have kept Starbucks ahead of the competition. Their active role and strong commitment and dedication to children’s education, many local causes, group organizations and the global environment for those countries who continue to provide their coffee have put a positive impact on how the company is viewed. According to Starbucks website, Social Responsibility consists of the following: The Starbucks Foundation, Commitment to origins, Building community, Environmental affairs, and many others. With one of their mission statements: ‘Contribute positively to our communities and our environment it is easy to see why they are a highly respected business.

The social responsibility activities that Starbucks has done so far, has benefited the company tremendously. By supporting literacy programs, they attract more educated customers. By providing medical aid, and monetary donations to those countries that supply their coffee beans, they ensure future availability and supply to their buisnesses. Not to mention the amount of jobs they have brought to numerous cities, and countries. Most importantly, they are able to establish themselves as an important part of not just the business aspect but also of the social. Of course, their interest is not mainly for the good of humanity. They want to make money and ensure their profits. But the way to these profits leads through the development of and fair trade with poor countries

Howard Schultz, along with the other managers at Starbucks, believes that the benefits of employee satisfaction, and community and global outreach outweigh the costs. With an average sale of $3.50 per cup of coffee, most customers return at an average of 16 times a month! This is proof that Starbucks has become an integral part of American Society.

There mission is not to jeopardize the quality, ambiance, or service due to expansion into a global marketplace. Besides writing, adopting, and implementing a mission statement, Starbucks has outlined their guiding principles, which is closely followed throughout their business:

1. Provide a great work environment and treat each other with respect and dignity:
2. Embrace diversity as an essential component in the way we do business;
3. Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee:
4. Develop enthusiastically satisfied customers all of the time;
5. Contribute positively to our communities and our environment;
6. Recognize that profitability is essential to our future success.

Starbucks is not a perfect company. However, it has proved to be a company who has managed to make the voyage to success without compromising key principles of the guiding vision. As Starbucks embarks onto the 21st century, will Starbucks be able to maintain the integrity of its vision? I believe so. With excellent business values, and a strong sense of leadership backing them, Starbucks has continually proved itself to be the American dream of what a successful company can be.

A corporation is an artificial legal entity, technically, a juridical person which, while made up of a number of natural persons or other legal entities, has a separate legal identity from them. Being a legal entity the corporation obtains legal rights and duties. The main features of incorporation includes: limited liability, meaning that the possible losses cannot exceed the amount which they added to the corporation as dues or paid for shares.

The economic justification for this lies in the fact that it permits anonymous trading in the shares of the corporation by virtue of removing the corporation’s creditors as a stakeholder in such a transaction. Without limited liability, a creditor would not likely permit any share to be sold to a buyer of at least the same creditworthiness as the seller. Second is perpetual lifetime – the assets and structure of the corporation survive beyond the lifetime of any of its members or agents.

This allows for permanence and collections of capital, which thus becomes available for investment in projects of a better amount and over a longer term than if the corporate assets remained subject to dissolution and distribution. It is imperative to note that the “perpetual lifetime” feature is a sign of the limitless possible period of the corporation’s existence, and its accumulation of wealth and thus power. In theory, a corporation can have its charter revoked at any time, putting an end to its existence as a legal entity.

Nevertheless, in practice, dissolution only occurs for corporations that request it or fail to meet annual filing requirements. Third is ownership and control – humans and other legal entities composed of humans, such as trusts and other corporations, can have the right to vote or share in the profit of corporations. In the case of for-profit corporations, these voters hold shares of stock as proof of ownership of the corporation, and are thus called shareholders or stockholders.

When no stockholders exist, a corporation may exist as a non-stock corporation, and instead of having stockholders, the corporation has members who have the right to vote on its operations. If the non-stock corporation is not operated for profit, it is called a not-for-profit corporation, the corporation comprises a collective of individuals with a distinct legal status and with special privileges not provided to ordinary unincorporated businesses, to voluntary associations, or to groups of individuals Corporations were created by special charter of governments.

These are usually registered with the state, province, or national government and become regulated by the laws enacted by that government. Registration is the main prerequisite to the corporation’s assumption of limited liability. As part of this registration, it must in many cases be required to designate the principal address of the corporation as well as a registered agent, a person or company that is designated to receive legal service of process. As part of the registration, it may also be required to designate an agent or other legal representative of the corporation depending on the filing jurisdiction.

A corporation files articles of incorporation with the government, laying out the general nature of the corporation, the amount of stock it is authorized to issue, and the names and addresses of directors. A board of directors governs a corporation on the behalf of the members. The corporate members elect the directors, and the board has a fiduciary duty to look after the interests of the corporation. The corporate officers such as the CEO, president, treasurer, and other titled officers are usually chosen by the board to manage the affairs of the corporation.

Corporations can also be controlled (in part) by creditors such as banks. In return for lending money to the corporation, creditors can demand a controlling interest analogous to that of a member, including one or more seats on the board of directors. Creditors are not said to “own” the corporation as members do, but can outweigh the members in practice, especially if the corporation is experiencing financial difficulties and cannot survive without credit.

A transnational (TNC) corporation is simply a large business organisation which operates and has ownership of assets in more than one country. Most TNCs operate in just a few countries, are involved in manufacturing and services and have their head offices in more developed countries. TNCs are responsible for employing over 40 million people worldwide, indirectly influence an even greater number, and to control over 75 per cent of world trade.

At first, many branches of TNCs were located in economically less developed countries, but there has been an increasing global shift to the affluent markets of Europe, North America and Japan. The reason why TNCs originally decided to locate in less developed countries was due to the existence of valuable resources, but the most important reason was the level of incentives offered by the home government.

Also read this 

If a TNC decides to settle in an LEDC, there will be huge benefits. Many new jobs will be created, which will be filled by local labour. The jobs will probably be better paid than other jobs supplied by industry which developed within the country. On the other hand, the wages will be much lower than the wages given for the same job in an MEDC. This is another reason why TNCs choose to create branches in LEDCs.

The jobs supplied by the TNC will probably require some basic skills, especially if it involves the manufacture of a good. The education will be supplied by the TNC, and will probably be of a fairly high standard if they want the branch to be very productive. The employees will benefit from these skills, because they would be able to use them in other aspects of their lives.

The TNC will supply the expensive machinery used in manufacturing for the employees, which may also introduce new technologies as well. This will enable the country to progress and allow companies to use the new technology to develop. Because worker wages is increasing, demand for consumer goods will increase as well, another reason why new companies will be tempted to develop.

Mineral wealth and new energy resources will develop,

Because there is more trade in the country, there will be more reason for roads to be built, as well as railways and airports. The TNC may help fund the development of these because it will improve the importing and exporting ability of that country. The government will probably supply money for the transport links as well, due to the increasing amount of money coming into the country.

The increased amount of money made by the country can also be used for many other things. Health control could be introduced, which means workers will be given improved working conditions and health plans. This could also help to improve output further because workers will be in a better environment and mood to work. Money can also be used for environmental control, which could include developing ways of minimizing the amount of pollution certain industries create and even developing new production methods.

Although the advantages to the country are numerous, there is a negative side which includes many disadvantages.

Although the new TNC will supply many jobs, the cost of investment will be high.

The new TNC will know that wages in the target country are very poor and so they will not have to pay workers as nearly as much as they pay employees in MEDCs. This is quite unfair, because the TNC is taking advantage of the people in the LEDC. Furthermore, employees will be made to work very long hours with little or no breaks.

The TNC will most likely choose not to employ local highly skilled workers, because they will expect higher salaries and better working conditions. This will mean that low skilled people will be given jobs, but higher skilled workers will remain unemployed.

As previously mentioned, the TNC will most probably enjoy large profits if they set up branches in LEDCs. The problem is most of this money will not stay within the country because the main branch of the TNC will be situated in an MEDC. This means money will not stay in the LEDC; there will be an outflow of wealth.

If money is going abroad, the GNP of the TNC will increase rapidly. The GNP of the LEDC used will increase as well, but at a slower rate. This means that development speed of the MEDC will far exceed that of the LEDC. This defeats one of the main reasons why TNCs setup branches overseas; they want the country to catch up with the growth rate of other countries.

Technological advancements in the LEDC can eventually cause problems. Mechanisation will mean that fewer workers are needed because robots can do the jobs that the workers once did. The only workers needed will those used to maintain the machinery, which means the work force will be decreased substantially.

The raw materials which are located in the LEDC will most probably be exported instead of manufactured locally. If the country is using as lot of energy to develop, then this can cause a national debt. Therefore, the rate of development will be stunted and the country will have been taken advantage of. This could cause upset within the workforce, creating strikes.

This can cause further problems because the firm is not located within the country. They could choose to pull out when ether they like, meaning many jobs would be lost. This would not be a great loss to the TNC though, as they have many other branches they can rely on.

The money created by these TNCs would probably be better off spent on improving housing, diet and sanitation than roads and airports for trade. The problem is that the TNC would not benefit as much from these improvements so it does not concern them.

The development of new firms can damage the environment because land must cleared for factories to be built. This could destroy the natural homes of species of animals, which is very difficult to correct. Because the target country will not be aware of the amount of pollution produced by industry, the laws on pollution control will not be as tight as the country where the firm is located. This could cause health problems, especially if a lot of waste is produced and dumped into the local water supply, for example.

It is clear that there are many advantages and disadvantages in terms of TNCs creating branches in other countries. The real problem is that the disadvantages mostly affect the target country, not the TNC. So until LEDCs are aware of the problems caused by firms settling in their country, the chance of the growth of TNCs slowing down is very small. This could cause the gap between the levels of development in LEDCs and MEDCs to become even wider in the future.

Olin differentiates itself from competitors by focusing the merchant market. Sales and growth This is a cyclical industry. This cyclical arises because supply is limited by the physical capacity of manufacturing facilities and ability to sell the co-product. Given these are commodity products, prices are very responsive to changes in supply and demand. Timing capacity growth with the cycle leads to a growth in sales. Demand for end-products ultimately drives demand for Color Alkali. The energy advantage North America has by using natural gas instead of crude oil has grown exports of end-products.

Customers Most of sales are to the merchant market. The company is able to capture a greater hare of the merchant chlorine market than its overall share of the market capacity because it focuses on the merchant market instead of using the products in downstream production. Costs and Suppliers Almost 50% of production costs is raw materials. The two major needs are electricity and salt. Electricity comes from coal, hydroelectric, natural gas and nuclear power. Regulatory Olin must comply with legislation regarding the environment, such as air, water and land quality, which requires capital expenditures and increases operation costs.

The company has programs in place to minimize waste and prevent pollution. Legislation as passed in October 2009 surrounding the use of mercury cell technology, but expired without enactment. This would have increased the costs of operating mercury cell capacity, of which Olin has one facility. Since it is uncertain whether something similar will happen in the future, Olin chose to convert its mercury cell capacity now, that lead to a restructuring charge incurred in 2010. Winchester Olin has held Winchester for 80 years. Winchester is “the premier developer and manufacturer of small caliber ammunition”.

Production is located in East Alton, IL, but new plans were announced in 2010 to move this operation to Oxford, MS. This would be the most modern production facility in North America and reduce operating costs by $30 million. Competitive environment The ammunition industry creates branded consumer products. Factors contributing to product differentiation include performance, product innovation and brand recognition. Among competitors, Wellness’s NAS Eden addle to leverage I TTS Drain name, making it one of the three largest commercial ammunition manufactures in the United States, along with Lillian Tachometers and Remington Arms Company.

Sales and growth Winchester has been able to drive sales by being a retail brand of choice and an industry innovator. Recently, the company has developed reduced-lead and non-lead products. Sales are seasonal with an increase in sales during the fall hunting season. Several five-year contracts provide stability in future sales going forward. Currently, Winchester does have a backlog of $178. 1 million which is down from the previous year. Customers Customers include retailers, law enforcement agencies, and militaries.

Winchester has developed strong relationships with industrial customers, mass merchants, wholesalers and specialty sporting goods retailers. The company also holds several entrants with the U. S. Government, accounting for 5% of sales in 2010. Costs and Suppliers The raw materials needed include copper, ammunition cartridge case cups, and lead, purchased from vendors at the market price plus a conversion charge. Propellant, the other raw material needed, is purchased mostly from one large U. S. Supplier. Management and Ownership Management has a strong understanding of long-term value creation.

Olin uses a discounted cash flow model to value the company’s goodwill and reviews their assumptions annually and/or when assumptions are changed by circumstances. Olin sees several compensation methods that help align management’s interest with shareholders’. A table outlining compensation can be found on page 29 of the appendix. Institutions account for 80% of the common stock while insiders hold less than 1%. Olin common stock, traded on New York Stock Exchange, has 80. 2 million shares outstanding with an estimated float of 79. 5 million.

For this interview, I was so fortunate to have President of Medal Corporation Dry. Quickens with me on Monday. Dry. Quickens as a guest speaker for course ASSESS operation management invited by Professor Burger. Medal Corporation is a company provides quality products like breastplate and breastfeeding accessories for the needs of nursing mothers around the world. Medal is a Swiss privately held company; it based in Machinery, IL, has more than 600 of employees with about $400 million revenue last year.

They are business-to-business based company have about 6,000 customers around 35 countries worldwide. He mentioned their product flow process, the first two steps kind like the Chapter 3 in the textbook. First, they will do Forecasting which also means estimate how many PANS retail customers will order so their supplier “MINCE” can buy parts to build product for them. The reason for that is because Medal products only when they get an order, also known as “make-to-order”, not “make-to-stock”.

Second step is Demand Planning; elect all PANS’ forecast by all departments, retailers, hospitals and hundreds of MINCE Stock keeping units as well. Then is Supply Chain using lead times ERP software calculates parts to order and when, also the pre-step of purchasing. After that they Purchasing, taking Customer orders, making Production Planning, then having Warehouse ready and finally they start Production process and shipping them to customers around nationwide.

Then Medal realized getting breast milk from mom to baby is not enough for them from the marketing point of view. As its target market evolves, they should continue to stay relevant to their customer’s needs, which is mom. Mom nowadays is very different from any pried of time with different values, behaviors and media habits. The things like social media and smartness. These Moms are true digital native people. So, in order to truly connect their special needs, Medal come up the idea to build a social media system.

By using this way, they not only could give mothers’ access to the information and education about the benefits o proper use their feeding system, but also as part of company’s social media strategy, it also essential for facilitating their brand relationship with mothers’ values and trusts. Medal’s development plan is focusing on helping mothers meet their breastfeeding goals, and support their efforts, which is to breastfeed longer. Mothers can communicate their experiences to each other through this software. Also by providing this software 2417 all day ability support and available for all the mothers.

The benefit from the marketing point of view on the one hand could attracted more mothers using this, on the other hand could help them to build a biggest and activist mother social communities ever. Mothers actually get points according to how active they are on the site. By reaching certain points Medal will send they some coupon online. And for the company later could use this to lunch their new products with low cost of advertising all thanks for this brilliant system. Dry. Quickens mentioned “its not about price for our products, its about the products experiences and what can do for all their customers. “

When considering what type of environment analysis to do certain things should be taken into consideration this is do to with the fact that different industries will have different requirement. For example Carnival in a multinational company so it may be more concerned with political issues then local customer perceptions or the customer demographics. Johnson & Scholes (1999), David (2001) and Lynch (2000) all agree that organisations or managers should adjust and change according to an environment analysis.

Mullins (1999), Johnson & Scholes (1999) and Lynch (2000) all agree that a good starting point for an external analysis would be the ‘PEST’ analysis. ‘PEST’ means political, economic, socio-cultural and technological (see appendix 1). The PEST analysis is only a very general analysis of the external environment. This is why another audit should be used to “inform and guide analysis” (Johnson & Scholes, 1999: 104).

If a company wants to plan for the future Johnson & Scholes (1999), Lynch (2000) and Mintzberg, Ahlstrand & Lampel (1998) all agree that the ‘scenario planning’ is all about the long term. Johnson & Scholes (1999) and Lynch (2000)’ agree it is one way to help companies looking into the future. One thing that companies must understand is that “scenarios are concerned with peering into the future, not predicting the future” (Lynch, 2000: 111)

Scenario planning is about considering factors that could affect the company for example if there was a terrorist attack in the future on one of the Carnival cruise liners. What steps could be taken to prevent the attack or to make sure that the customers are safe?

In all industries customers are the ones that buy the product or use the service this may be other companies or the general public. This is why analysing the customers and market segmentation is very important. It is important for organisations to understand that customers “have different characteristics and needs” (Johnson & Scholes, 1999: 129).

Lynch (2000) states that there are three important issues that should be conceded when analysing the organisations customers. The first is to identify the organisation customers and market. The second is its segmentations and its strategic implications. The final one is the role of the customer service and quality.

Porter’s Five Forces model (see appendix 2) is a more in-depth analysis of an organisation it focuses more on strategy so companies can develop opportunities and protect them self from threats. The five forces are:

1. The bargaining power of suppliers;

2. The bargaining power of buyers;

3. The threat of potential new entry;

4. The threat of substitutes;

5. The extent of competitive rivalry.

(Lynch, 2000:125)

One of the best ways to describe Porter’s Five Forces Model is:

“… a high force can be regarded as a threat because

it is likely to reduce profit. A low force, in contrast, can

be viewed as an opportunity because it may allow the

company to earn greater profits.”

(Wheelen & Hunger, 1998: 61)

It is argued that customers are the most important part of the business:

“Customers demand satisfaction and expect more.

It is no longer sufficient to merely satisfy customers

They need to be delighted, both internally and

Externally.”(Mullins, 1999: 869)

This is why customer analysis is so important to Carnival with out any customers the company would not generate any revenue. One thing that they do know it that the disposable income of young couples and families has increased over the last fifty years. What they are trying to do it tell the target market that cruising is an alternative vacation available for everyone.

Carnival believes that 93 percent of North Americans have not taken a cruise at some stage. This gives then a target of almost 100 percent of North Americans that they can attract, to go on one of their cruises. This is due to the fact that they can try and attract the people that have already been on a cruise.

Carnival is the first modern Cruise Company and tries to promote its ships as ‘fun ships’. With a price that can compete with land based vacation resorts. This is why they are the leaders and innovators of the cruising industry. They know that the cruising industry have three main market segments. The first is contemporary then premium and finally luxury this is why they have entered into all three market segments.

One thing that is very important to Carnival is the customer service that they provide. As well as a high level of service they want to offer a product that will attract the customers. This is why they offer a package that will allow passengers to stop at exotic ports of call as well as a premier restaurant service. What they are trying communicate is that the ship is not just a means of transport but the vacation it self and the ports of calls are bonuses for the customers. This is why they offer such entertainment as live music, dancing, night-clubs, movies as well as a casino this is the entertainment in the evenings.

Carnival wants to offer a high level of service this is why their holidays start when you bags are tagged for the ship. After that moment you would not need to pick your bags up because it would be delivered to your cabin. When on board waiter on the ship will offer you drink while they help you to find your way around. With a restaurant service that could rival any top land based restaurant in terms of variety in food and wine. With this sort of service they can keep on attracting the customers that in turn create the profits that the organisation wants.

Executive Summary Overview Nike is the market leader in athletic shoes in the United States. The Oregon based company has always utilized offshore facilities in low-income countries to produce at minimal costs followed by importation into predominantly the US for sales. Nike is quick to divest from emerging markets as costs rise and has recently signed short term production contracts with a long term strategy of production in China. Unlike Nike’s previous global endeavors, the political and cultural atmosphere in China has made the collaboration more demanding. Opportunities

As the South Korean standard of living continued to improve, expected wages grew forcing Nike to look elsewhere for low cost shoe production. Market research identified China and India as the best long term possibilities for the new production facilities based on finances. Due in part to a trusting relationship between Nike and the Chinese government based on the family lines of vice president David Chang, China was determined to be the optimal location to grow. The possibility of a joint venture giving Nike access to a possible billion customer market was another opportunity that could only be found in China.

Issues in China Nike has spent the last four years building facilities, training staff, and developing relationships in China. Unlike other facilities in low GDP countries that had been utilized previously, the China collaboration has been less than successful. The current infrastructure combined with landlocked facilities made transportation logistics difficult. The Chinese government had certain expectations and standardization requirements that were misaligned with Nike’s incentives in terms of quality, pay, pricing, and employee motivation.

The PRC government also created difficulties in import/export restrictions causing logistical problems with raw materials, specifically anything entering the country through South Korea, a major Nike supplier. While a foothold in China could eventually lead to an enormous new customer base, the current global strategy was ill suited to take advantage at the current time. Options * Shift strategies in China from global to multi-domestic to take advantage of the market. This option would require the formation of a joint venture with the Chinese government. Move factory locations to reduce transportation and logistics issues. * Pull out of China completely. Recommendations We believe the government regulations will make quality improvement and cost effectiveness highly unlikely in China. Furthermore, a multi-domestic strategy requiring a high investment rate would be required to take advantage of the Chinese population as a new customer market. With low expendable income and a forced joint venture with the government necessary to sell Nike in China, we determined that selling in China is not currently an option.

As such, the team recommends an urgent identification of new possible production environments with a concerted and eventual total divestiture in China. Questions a. How has Nike conceptualized the athletic shoe industry: global or multi-domestic? Justify your answer. What are the implications of this conceptualization? Nike instituted a global strategy, as opposed to a multi-domestic strategy, from the company’s onset to compete in the athletic shoe industry.

Knight identified opportunities abroad to reduce costs in the upstream functions of the value chain. Through the coordination of overseas operations integrated with US downstream functions focused on local US markets, Nike’s utilization of a Porter-defined global strategy has brought the company to China. The Far East’s Role in the Value Chain Beginning with the first Japanese facilities, Nike factories located in the Far East, Europe, and South America have accounted for approximately 93% of shoe production with only minor assembly in the US.

The identified regions within this concentrated configuration were almost exclusively production-only facilities without the R&D, sales and marketing, and other downsteam services required for a successful multi-domestic strategy. The countries had been targeted due to low costs with certain factories being divested over the years due to increasing wage rates and political uncertainty. Competition to reduce costs between different countries was key to identifying new opportunities and deciding on which factories would remain open as economic factors changed.

While reducing costs was the main concern in global production, Nike could not accept a subsequent loss of quality. Previous experiences in Far Eastern plants had proven successful via quickly accepted technology transfer and ratios of grade-B shoes falling below 5% at rapid rates. Without the combination of high value and low cost, the strategic competitive advantage would be lost. Assumptions and Implications of a Global Strategy Nike moved to China based on their strategic history of standardizing the operations life cycle. Knight believed China would mirror other Far Eastern locales.

Cost cutting assumptions included pay based on relative Chinese wages (as opposed to relative Nike production wages), employee incentives capabilities, minimal import/export barriers, and an infrastructure for facile distribution logistics. For each unforeseen difficulty encountered along these assumptions, Nike’s costs would increase and could drive margins down to a point where China would no longer be financially competitive. The Olympic team public relations venture attempted to further the relationship between Nike and the Chinese government, not to present a new product for the public.

The millions spent were misaligned with a low cost model and were identified with past exploitations by the West. While the possibility of two billion feet was enticing, Nike was in China to produce, not sell, shoes. There was no plan to market, distribute, or sell in China. Accordingly, the idea of a joint venture should not be on the table under the current strategy. However, the PRC strongly pushed JVs and the lack of a true collaborative environment could be detrimental in an environment so heavily regulated. b. Speculate on the reasons for Nike wishing to enter China.

Before the entry do you think these reasons were valid? Justify your answer. China’s Excellence in Manufacturing China is known for their excellence in manufacturing. Nike intended to exploit this excellence in order to drive down their supplier costs, while maintaining their customer’s willingness to pay constant which creates value for Nike’s customers and shareholders. Prior to entry and based on Nike’s due diligence, this was a valid reason. However, Nike either underestimated or did not entirely comprehend the challenges of conducting business is China.

From the difficulty of sourcing local materials to the inconsistency in quality of the finished product, China was not the optimal manufacturing location for Nike. Rapid Growth of the Athletic Footwear Market in the 1970’s (& Bad Forecasting) Perhaps Nike did not do enough high quality market research to see that the growth was slowing in their market. Nike may have become complacent due to their dominance in the industry or Nike may have discounted the market trends in the athletic footwear industry that showed a decline in the rate of growth, when comparing the 1970’s to the 1980’s.

The bottom line is that Nike did not accurately forecast and adjust their strategy to the athletic footwear industry trends and market conditions. Prior to entry and based on Nike’s due diligence, this was a valid reason. Nike chose to enter China, in part, to meet the demand of the growing market. However, perhaps they should have spent more time and resources on market research, which would have revealed that the growth rate was declining, and perhaps additional suppliers were not necessary to carry out their business plan after all and that a different international location might better meet their sourcing needs and goals.

Rising Costs from Existing Suppliers One of the reasons Nike planned to enter China was due to the costs of conducting business in other countries (for example, South Korea and Taiwan) had been increasing. Nike thought that they could source product from China at a lower cost than their current offshore producers. Prior to entry and based on Nike’s due diligence, this was a valid rationale. Due to the multiple issues that Nike faced in China, the costs associated in producing a pair of shoes were actually higher in China than their other international producers. See Table A in the appendix for a landed cost comparison from the case.

Two Billion Feet Although the case clearly specifies this is not a reason for entry into China, one of Chang’s motives may have been to sell directly to the Chinese. The size of the Chinese population is over three times the size of the United States. Even though the shoes produced in China were for the US, Chang may have considered producing a low cost shoe for the Chinese. Perhaps Nike’s long term strategy was to navigate the Chinese political system, develop a strong local production presence, and then ultimately sell low cost footwear directly to the Chinese market.

This reason was not valid prior to their entry. Nike’s product was not produced for the Chinese, as the average Chinese consumer could not afford the product. b. How did the decision to enter China complement Nike’s overall strategy? Nike’s decision to enter China was based on flawed information. Nike underestimated the inherent challenges (political bureaucracy, materials sourcing, shipping and transportation, quality control and the Chinese culture of non-motivation and non-commitment) they faced when conducting business in China.

Nike also failed to accurately forecast the demand in the athletic footwear industry. The decision ultimately hurt Nike’s overall strategy, as their production costs rose, while the demand for their product was declining. Higher cost and declining demand both negatively affected Nike’s bottom line. c. Identify the entry and ownership strategies used by Nike in entering China. Do you think they were appropriate? Base your analysis on the entry and ownership strategies outlined by Robock and Simmonds, referenced above. Justify your answer.

As costs started to rise in other Asian markets, Nike made the strategic decision to open new full-scale manufacturing facilities in China, with the goal to reduce production costs. Nike’s entry strategy into China created obstacles in achieving their long-term goals, which they should have foreseen. Below are a few factors that contributed to the obstacles. External Factors Nike underestimated the scope of the Chinese bureaucracy. Nike’s only choice was to hire a consultant to navigate the issue. This consultant increased Nike’s costs of doing business in China.

Furthermore, Nike overestimated the size and future growth potential of their target market. Nike should have conducted additional due diligence and more thorough market research before deciding to move into China. In addition, Nike did not forecast the materials sourcing issue, which added to product costs. Internal Factors Nike failed to forecast/implement some key factors when deciding to enter China. Nike lacked the necessary internal operations to actively manage and solve production problems in real time. Also, Nike had great difficulties communicating the issue of quality control to the Chinese.

Furthermore, the Chinese managers and workforce lacked motivation to perform their jobs to levels satisfactory to Nike. Ownership Nike chose to be wholly owned. Nike did not pursue the joint venture route, even though China tried to persuade Nike otherwise. Nike did, however, hire a consultant as a strategic partner to help them navigate the challenging bureaucracy. Given the political climate in China, perhaps Nike should have approached China with a joint venture agreement. Having China as a partner may have saved Nike time and resources when launching a new manufacturing platform.

Or, perhaps Nike should have formed a strategic partnership with a local footwear manufacturer in order to bypass some of the issues with starting an entirely new facility and would have had some assistance in navigating the local market. d. Would you say Nike’s entry into China was a success? Give reasons for your view, explaining why the entry was successful or a failure. At the time of case study, Nike’s entry into China was not a success. This evaluation is based on several reasons primarily due to the cultural clash between Nike and Chinese production.

By 1984, Nike encountered a range of problems—from quality issues (only 80% of Chinese shoes were A-Grade), to inventory management (records kept on a guess method of expected usage), lack of flexibility from Chinese managers, motivational issues with management and workers, as well as complex and difficult government relations. Quality Issues in Product and Management When China’s reformist leader, Deng Xiaoping, opened China to foreign investment and global market opportunities, Nike seized the opportunity to buy a finished shoe product from the PRC as a long-term, low-cost supplier.

However, despite China’s opening to the global market, it still existed as a socialist state with severe trust issues and obstructions to the free flow of information. These factors compounded to cause an array of production difficulties. Due to the Chinese factories still producing 20% B-grade shoes (significantly higher than both South Korea and Taiwan), Nike management not only wasted additional time arguing with Chinese managers on the quality problems (rather than actually improving the problem) but Nike also had to hire additional inspectors for each factory.

While the money spent to hire these inspectors was relatively low, this illustrates the need for oversight and the lack of faith and trust in the Chinese managers to run the factories to Nike’s standards. Governmental Regulation Additionally, as a socialist state, Chinese workers lacked motivation to increase production (factories at a standstill by midday) and to adhere to production schedules since they would be paid the same regardless of output. Even attempts by Nike of monetary incentives only appeared to have an effect for approximately 60 days.

Because of the central planning system, the Chinese managers were used to stable prices. Price negotiations proved extremely difficult as none of the actual participants in the negotiations (foreign trade bureau, factory directors, local production bureau leaders) had the authority to make price decisions—everything relayed to authorities in Beijing. Compared to Korea or Taiwan, negotiations were slow which was extremely detrimental in a global and ever-changing environment. The levels of bureaucracy in China were much higher than those encountered in South Korea or Taiwan.

Although Nike tried to establish a positive relationship with China (through contributions to the country’s sports activities and hosting various Chinese officials visiting the U. S. ), meeting with the high-live leaders in China did not prove useful. The Chinese bureaucracy made making decisions difficult as it was never apparent who was in charge of what and Chinese officials did not show the same level of interest in establishing a relationship with Nike (leaders sometimes did not show up for appointments).

Ultimately, all of the cultural difficulties resulted in extremely low production numbers (Nike originally targeted production growth to 1,000,000 pairs per month by mid-1980’s but annual production in 1984 was only 700,000 pairs), significantly lower than both South Korea and Taiwan. Although Nike had ultimately hoped for a 20% price advantage over Korea, they were still losing $1. 00 on each pair of PRC shoes while the quality was much lower on these shoes as well. e. Identify the options available to Nike regarding its operations in China.

If you were Chang at the time of the case, what future course of action would you recommend in China? Options Some of the options available to Nike regarding its operations in China are to pull operations out of China completely or consider entering into a joint-venture agreement with China. As of 1984, Nike’s foray into China has not been a success due to a variety of reasons (listed above). If Nike were to pull operations out of China, they would risk losing all of the equipment investment as well as damaging the sensitive and already tenuous relations ith the government. Other countries would have to be evaluated as a low-cost source of production. Some possible countries could be Indonesia or shifting a greater percentage of production to Taiwan as their comparative changes in unit labor cost, although increasing, were significantly lower than Korea or Taiwan. However, if Nike did decide to stay in China and enter into a joint-venture agreement, this step would potentially be viewed as a sign of trust and evidence of commitment by China.

Nike would also be allowed to sell its products in China—a significant market to consider with a population of 1 billion people. Nike would also have additional freedoms with regards to hiring and dismissing personnel. The costs of a joint-venture agreement though, were estimated at $500,000 per factory and worker salaries would be about 20% higher than local factories. Recommendations to Nike If we were Chang at the time of the case, the future course of action that we would recommend to Nike would be to pull out of China operations.

Although the possibility of access to a market with 1 billion people seems counter to this decision, China’s great strides in opening to global markets indicates the likelihood that Nike will be able to access this consumer at some point without having to make the commitment of a joint-venture agreement. Additionally, while recognizing the sunk-costs bias, we feel that the potential costs to continue operations in China would result in Nike still losing money on each pair of shoe produced instead of cutting their losses and finding another profitable production avenue.

Conclusions Nike saw China, as well as the many impoverished nations where previous production had occurred, as a part of the supply chain with a cost effective advantage. Korea and Taiwan had become increasingly expensive and China was a long term option. Unfortunately, Nike did not understand the political or cultural implications for utilizing China as part of a global strategy. The political environment and infrastructure in China created unforeseen difficulties for Nike in building an efficient production system.

Government controlled wages reduced the influence of incentives for both work efficiency and quality. Strained relationships with the South Korean government made importation of materials slow and expensive. Transportation logistics and regional cultural differences made the government suggested sites for initial factory locations less than ideal. China’s two billion feet did not align with Nike’s global strategy. The Chinese public could not afford the high costs for the Nike brand and current ROI expectations could not be achieved.

The Chinese government’s relationship approach to external companies would have much greater acceptance towards a mutually beneficial joint venture. Some saw Nike’s global strategy as exploitation. The financial impact of Nike’s strategy could not be delivered in China. The collaborative relationship desired by the Chinese government was misaligned with Nike’s needs. Together, it becomes apparent that the best option for Nike is to locate a better location for production urgently and completely divest in China.