Nike and Technological Innovations - Essay Example

ANNUAL REPORT ANALYSIS FOR NIKE] By Insert Presented to Location Due Executive Summary Background Nike is an incorporated athletic footwear and apparel manufacturer. Its principal business is “the design, development, and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories, and services” (Nike Inc., 2014, p. 47). Financial Overlook Total revenues - $27,799 million, a $ 1,486 million increase from total revenues in 2013 Gross profit - 12,446 million dollars in 2014 and 11,034 million dollars in 2013. Net income - 2,693 million dollars and 2,451 million dollars for 2014 and 2013 respectively. Five Forces Analysis A competitive advantage based on differentiation and one-to-one marketing Diversified products offering Customized products to meet specific needs Significant threat of Supplier’s bargaining power Macro-Environment analysis PESTLE model Nike has effectively addressed social issues through technological innovations Nike complies with legal requirements both in the US and Internationally Brief background of Nike Nike is an incorporated global footwear manufacturer. It was incorporated in 1968, under the state of Oregon laws (Nike Inc., 2014, p. 47). At the time of its incorporation, Nike was chiefly involved in the manufacture of sports footwear. However, it has expanded its operation and business over the years and according to its annual report, Nikes principal business is “the design, development, and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories, and services” (Nike Inc., 2014, p. 47). From this business description, Nike clearly has a wide scope of activities. This is probably one of the factors that have contributed to its position as the world’s largest of athletic footwear and apparel (Nike Inc., 2014, p. 47). Perhaps another factor that has contributed to this status is its adoption of technology-based innovation. Nike indicates that one of the channels through which it sells its products is its websites, a marketing venture it refers to as Direct to Consumer (DTC) operations. Indeed, Nike has carved out a niche for itself as the brand to watch in the sports world. Nike’s annual report is now analyzed to understand how and why Nike has managed to attain this achievement. Annual Report Analysis Nike has a wide revenue base. It has a wide range of products from which it develops its product mix. According to its annual report, there are eight key categories of Nike’s product offerings. These are running, basketball, football (Soccer), women’s training, men’s training, sportswear, action sports and golf (Nike Inc., 2014, p. 47). Nike sells its products in a number of markets and geographical segments. It reports the following operating segments: North America, Western Europe, Central and Eastern Europe, Japan, Greater China and Emerging Markets. Moreover, Converse operations, whose results are reported independently, are another of Nike’s segments. In terms of sales revenues, Nike classifies its revenue collection as either local or international. For the 2014 fiscal year, Nike and Converse sales in the US contributed to 46% of total revenues.26 % of these sales came from Nike’s three largest customers (Nike Inc., 2014, p. 48). In retrospect, sales from the international category accounted for 54% of Nike’s total revenues. In this category, its three largest customers accounted for a total of 6% of its international revenues. Financial data is usually an important element for any entity. Such data arises from the accounting process and is usually represented as financial statements. The financial summary presented in a financial statement is essential in planning a company’s future activities. The financial information for Nike is as discussed below. For the year ended May 31, 2014, Nike registered total revenues of $27,799 million. This was a $ 1,486 million increase from its total revenues in the 2013 fiscal year. During this period, the gross profit was 12,446 million dollars in 2014 and 11,034 million dollars in 2013. Moreover, the net income for the two years from its continuing operations was 2,693 million dollars and 2,451 million dollars for 2014 and 2013 respectively. The gross profit margin is a particularly important indicator of financial health for any organization. It indicates the number of dollars earned for every dollar of sales. It is evaluated as the quotient of gross profit divided by sales. The gross profit margin indicates the ability of a company to cater for the costs of its operation. For Nike, its gross profit margin for the fiscal year ended 2014 was 44.8% while for 2013, the same was 43.6%. Nike’s gross profit margin is generally stable with only minor fluctuations. With respect to previous years, the overall trend indicates an increase in revenues, gross profit, gross margin and net income. This indicates that Nike’s operations are increasingly geared towards maximizing its profit margins. The fact that there is an overall increase in Nike’s revenue indicates an increase in its price per unit sold or a greater total number of units sold. The second alternative is the more plausible one but for purposes of certainty, one can use the return on assets as an evaluation tool. The return on assets is a product of the return on sales (net profit margin) and the asset turnover. The return on sales indicates how a much a company retains for every dollar of sales made. The asset turnover on the other hand points towards the revenue generated for every dollar of assets invested. In its most basic expression, the return on assets is a quotient of the net income over assets. For Nike, its ROA for 2014 stood at 14.9%, a decline from previous years where in 2013, for example, the ROA was 15.3%. Its net income stood at 2, 693 million dollars, which was an increase whereas its assets stood at 18,594 million dollars, which was also an increase from 17, 545 in 2013. Based on the ROA, the most likely scenario is that Nike increased the total number of units sold hence the decline in its return on assets. Another ratio that can be used to assess the position of Nike with a basis on its financial data is the current ratio, which is a liquidity ratio. This ratio provides an indication of a company’s ability to pay off its short-term liabilities. The current ratio is usually evaluated as a quotient of current assets divided by current liabilities. Besides serving as an indicator of the ability to pay off short-term obligations, the current ratio provides insight into the efficiency of the company’s operations and its ability to sell its products. For Nike, its current ratio for the fiscal year ended May 31, 2014 was 2.7. While this was a decline from previous years, it is still a good ratio. The implication is that Nike is excelling in its sales and is also not accumulating significant debts. Moreover, owing to the high availability of current assets, Nike can manage to take on short-term debts in order to bolster its productivity. Process efficiency can also be evaluated through the analysis of asset utilization efficiency. There are several areas of asset utilization whose efficiency can be evaluated including inventory utilization, operational efficiency and utilization of fixed assets. Asset utilization ratio measures the asset utilization efficiency for fixed assets of a firm. It is usually evaluated as the quotient of sales/turnover divided through by the capital employed or total assets. For Nike, its asset utilization efficiency may be obtained as follows the quotient of $ 27, 799 million divided through $ 18, 594 million which yields 1.5. The computed asset utilization trends are indicated below Table 1: Asset Utilization efficiency of Nike 2014 2013 2012 2011 2010 Sales 27, 799 m 25,313 m 23,331 m 20,117 m 18,324 m Total Assets 18, 594 m 17,545 m 15,419 m 14,958 m 14, 382 m Asset utilization Efficiency 1.5 1.44 1.51 1.34 1.27 The general trend indicates an increase in the asset utilization efficiency over the years. This is a good indicator for Nike particularly since it has discontinued some of its operations which were effectively contributing to losses. With improved asset utilization, along with its relatively stable gross profit margin and its high current ratio, then Nike can expect to continue experience an increase in its revenue and its margins of profit. Nike has continually experienced a trend of a progressive increase in its results. It has continued to report a net average increase not only in terms of its gross income, but also in terms of its net income and profits. Some of the figures pertaining to this trend are indicated in the table below. Table 2: Financial history of Nike extract Financial History Dollars in millions 2014 2013 2012 2011 2010 Year Ended May 31, Revenues 27799 25313 23331 20117 18324 Gross profit 12446 11034 10148 9202 8498 Gross margin % 44.80% 43.60% 43.50% 45.70% 46.40% Net income from continuing operations 2693 2451 2257 2163 1916 Net income (loss) from discontinued operations — 21 -46 -39 -16 Net income 2693 2472 2211 2124 1900 An extract of Nike’s financial statement for the fiscal year 2014 Source: (Nike Inc., ANNUAL REPORT ON FORM 10-K, 2014) From the above extract, it is evident that Nike has continued to experience an increase in its revenues, gross profits as well as its net income. This growth based on its past performance can be used to project future profitability. Investors and creditors alike actively use information from financial statements to predict future performance of a firm. In a similar fashion, the past performance of Nike can be used to derive future performance patterns. This is by assessing some of its financial ratios. The precise ratios that can be used to assess future performance are the market value ratios. One such ratio is the price per earnings (P/E) ratio. The P/E ratio primarily acts as an indicator of how much investors are willing to pay for every dollar of reported profits. It can indicate prospects for increased future profitability since P/E ratios are usually higher for those firms that have higher growth prospects. The P/E ratio is obtained as the quotient of the market price per share divided through the earnings per share (EPS). The table below represents the P/E ratio as indicated on Nike’s annual report. Table 3: Price/earnings ratio 2014 2013 2012 2011 2010 P/E ratio 25.9 22.8 23.0 19.3 18.8 From the above data, it is clear that the price per earnings ratio is experiencing continued growth. Consequently, this indicates the continued growth prospect of Nike hence it is expected to continue experiencing enhanced profits. Nonetheless, it is important to note that future prediction based on past performance faces several limitations. Such limitations may include the changing value of money with time which means that past financial data may have a higher actual value than the indicated value. It is therefore important to analyze external factors affecting Nike and how Nike is dealing with or intends to deal with them. One of the important features about Nike is that it recognizes the changing nature of its marketing environment in terms of its products and competitors. For any business organization, it is pertinent that it acquires a competitive advantage that will allow it to deal with its competition and other factors that may inhibit it from achieving its goals. A competitive advantage may be identified as a significantly long-term benefit that a company holds over its competitors. Nike has been able to acquire a competitive advantage which is the reason it is the market leader in sportswear and apparel manufacture. Companies acquire competitive advantage by implementing competitive strategies that align them strategically against competitors and competitive forces. For Nike, it offers a wide range of products to its consumers, thereby securing the competitive advantage of differentiation. In terms of its products, Nike has diversified its product offering to offer products in 8 key categories which have been outlined. These include Basketball, running and Golf. Nike management further indicates that its top strategy for the expansion of its gross margins is the delivery of innovative premium products that will fetch higher prices (Nike Inc., 2014, p. 64). The choice of differentiation for competitive advantage is further underscored by Nike’s strategy for achieving long-term revenue, which is to create “innovative, “must have” products, building deep personal consumer connections with our brands, and delivering compelling consumer experiences at retail and online” (Nike Inc., 2014, p. 64). Clearly, Nike’s strategic advantage is based on its wide products offering. Further, Nike continually engages in elaborate research into products with the purpose of delivering products that “enhance athletic performance, reduce injury, and maximize comfort” (Nike Inc., 2014, p. 49). This is an indication of its dedication to provision of high quality and innovative products. Nike’s research team comprises a wide range of professionals and specialists in areas such as chemistry, exercise physiology, biomechanics, engineering, sustainability and other related fields. Moreover, it also consults widely through research committees and advisory boards comprising experts such as athletes, trainers, coaches, orthopedists and podiatrists among others. The aim is to review the design process and materials in order to develop improved products that are compliant with product safety regulations around the world. Apart from its commitment to develop products that are compliant, Nike is also committed to the development of innovative products that factor in advances in technology. According to Nike, its design teams utilize market intelligence and research to leverage new technologies into existing products (Nike Inc., 2014). Some of the innovations incorporating technological innovations include NIKE AIR, Flyknit, NIKE+ and NIKE Fuel technologies which have proliferated through Basketball, Running and Women’s training among other categories. In terms of competitors, Nike acknowledges that it operates within a competitive market. Nike identifies a number of important aspects of competition in its industry of operation. These include product quality, new product innovation and development as well as price. A second aspect of competition deals with consumers’ connection and affinity for particular brands and products, support for and service to customers and endorsement from prominent athletes and leagues using its products (Nike Inc., 2014, p. 50). The final aspect discussed is the distribution process which should be effective and employ the use of attractive merchandising and presentation. Nike concludes by arguing that it is competitive in all of the identified areas. An appropriate tool that can be used to analyze the competitive forces that Nike faces is Porter’s five forces model. The first force in Porter’s model is the rivalry that exists among current competitors. Nike identifies a number of competitors in the athletic and leisure footwear, apparel and equipment industry such as Puma, Adidas and Li Ning (Nike Inc., 2014, p. 50). Nike has managed to achieve a competitive advantage as discussed above. The second force in Porter’s model the threat of substitute products. As noted, the apparel industry is very competitive with continuous innovation and improvements in quality products being some of its characteristics. Nike indicates that it believes it is competitive within this area, and this can be ascertained by considering its one-to-one marketing approach (Nike Inc., 2014, p. 50). Through its direct marketing strategy, Nike has not only been able to overcome the threat of new products, it has also secured customer loyalty. Thirdly, companies must also contend with the threat of new entrants in the market. There is no indication as to whether there is a significant threat of new entrants. However, owing to Nike’s competitive advantage, it is unlikely that Nike has to worry about new entrants. The final forces in Porter’s are bargaining powers of customers and suppliers. Buyers possess increased bargaining power where they are few or where they buy in large quantities. Suppliers on the other hand have a greater bargaining capability where they provide highly differentiated components. In terms of buyers, Nike indicates that for the fiscal year 2014, none of its customers accounted for more than 10% of its net sales (Nike Inc., 2014, p. 49). However, Nike may suffer from the buyer’s bargaining power particularly in the US where 26% of sales revenues were from three of its largest consumers (Nike Inc., 2014, p. 48). These three consumers possess significant bargaining power. When it comes to suppliers, Nike indicates that of its 150 footwear factories, the largest supplier accounted for 5% while for apparel manufacturers, the largest factory accounted for 7%. This indicates that Nike does not face a significant threat of suppliers’ bargaining power in terms of footwear factories. However, Nike faces a significant threat of suppliers’ bargaining power in reference to contract manufacturers of footwear where it reports that five of them each reported greater than 10% of production with an aggregate of 67% (Nike Inc., 2014, p. 49). Moreover, there is also a significant threat of supplier bargaining power from one apparel manufacturer who accounted for approximately 10% of apparel production. It is therefore imperative that Nike adopt appropriate measures to mitigate this threat. Nike’s macroeconomic and regulatory environment can be assessed using the PESTEL model. The PESTEL framework also referred to as PESTLE, analyses aspects on the political, economic, sociological, technological, environmental and legal framework. Political analysis involves an evaluation of factors such as governmental policies. The economic environment on the other hand refers to interest rates and inflation fluctuations as well as economic growth, disposable income and unemployment. In its annual report, Nike indicates that it evaluates economic parameters such as foreign exchange risk and interest rate risk using value-at-risk. Accordingly, Nike indicates that its estimated maximum loss in fair value is $ 50 million for 2014 (Nike Inc., 2014, p. 84). It however indicates that such a loss would be mitigated by increases in the value of its underlying transactions. The social environment refers to population changes, education levels, income distributions and attitudes towards work and leisure. Technological factors have to do with new innovations and the speed of obsolescence. Nike has adequately addressed social factors by incorporating technology in its processes. This is perhaps in recognition of the increasing role of technology in our day to day lives. As noted, Nike has developed several products such as NIKE+ and the NIKE Fuelband, which incorporate technology in the product offerings. Moreover, the direct to consumer sales achieved through its website is an astute indicator of Nike’s adaptation to changes in technology. The environmental aspect deals with the natural environment and its protection. Finally, the legal environment addresses legislation on product safety and on safety and health issues pertaining to workers. Nike indicates that it complies with the legal requirements of the countries in which it operates such as representation of employees by works councils or collective bargaining agreements (Nike Inc., 2014, p. 50). Though Nike faces a number of macro-environmental and legal hurdles, it has dealt with them appropriately by embracing requirements and adapting its operations to suit changing social and technological requirements. Conclusion Nike is a leading athletic footwear and apparel manufacturer. It has registered increased profitability due to its differentiation strategy where it offers a variety of products to its consumers. This strategy has afforded it a competitive advantage but it faces a significant threat of suppliers bargaining power. References Nike Inc. (2014). ANNUAL REPORT ON FORM 10-K. Oregon: Nike Inc. Read More