Written Case Analysis: Hitting the Wall: Nike and International Labor Practices

Stephanie HodgeBUSA 488 Creating and Managing Transnational Organizations

Professor Thad BarnoweSpring 2009

February 18, 2009

Written Analysis

Many companies today, in this growing world market, cannot be successful with

out considering the benefits that could be gained by expanding their business, or part of

their business, to other countries. As Bartlett, Ghoshal, and Beamish mention in the text

there are three macro forces that drive, constrain, and shape the industries in which

companies will compete globally. (2008). Companies must prepare for these three macro

forces in advance before entering into new countries to do business. If they don’t prepare

they will not be very successful in conducting business in another country and will not

gain the competitive advantage they strived for when deciding to conduct business

globally. Also, if a company does not enter the global market prepared they could run

into problems that they did not foresee, which could result in damage to the company

name and image, not only affecting international business but domestic business as well.

This in turn could create the company to sustain profit losses and gain a tarnished

reputation that they would have to fix to regain their competitive advantage and above

average returns.

In order to be a successful in operating in another country multinational

enterprises must have a manager or a set of mangers to deal with three very complex

external demands, cross-market integration, national responsiveness, and worldwide

learning. (Bartlett et al, 2008). No matter what aspect attracts a company to another

country whether it is, economies of scale, economies of scope, factor costs, or

liberalization of world trade, the company must come into that global market aware of all

the differences pertaining to the eight-facet model for analyzing country environments.

The company needs to be aware of the differences between the home country and the

host country, looking at the model these differences can include, physical, economic,

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legal, political, sociocultural, labor, financial, and competitive. Nike is a prime example

of a company that expanded their operations into a global market to gain a competitive

advantage, and like some other companies did not fully understand the scope of the

environment that they were moving into beforehand. Therefore, they did not fully

anticipate the negative worldwide response that would be generated in reaction to the

way they were conducting business in these developing countries. Along with this

negative response came a decrease in sales, protesting from many consumers and

organizations, and bad publicity from the media. Even though Nike is a large successful

company with a sought after brand image, this error on their part of not moving into a

country fully prepared equaled a recipe for disaster, and nearly cost the company their

good reputation.

Diagnosis

In this case we are presented with a multitude of problems relating to Nike and its

choice to outsource all it’s manufacturing to developing countries, which they did to save

on labor costs. Relating back to the text Nike made this move because of factor costs,

which is a powerful driver of globalization. (Bartlett et al, 2008). With the innovation of

technology and communication Nike is able to outsource a large part of their company,

the manufacturing portion, out of their home country, and still get all the products

shipped successfully to customers and retailers all around the world. However, in doing

so Nike experienced some of the problems that the text mentioned might happen to

companies outsourcing labor. One problem they ran into was that some of the developing

countries that they were doing business in became richer causing the labor costs to rise,

which the text said could happen as often as every five year. (Bartlett et al, 2008). This

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led Nike to have to move their manufacturing from South Korea and Taiwan to more

inexpensive plants in China and Indonesia. According to Bartlett et al, this can lead to

greater costs, which can in turn outweigh the costs that the company was saving to begin

with. (2008). The main reason Nike decided to outsource their manufacturing was

because with the money that they saved in labor they could dedicate more funds into their

marketing campaigns. In addition, to saving on labor costs Nike was hoping to increase

their competitive advantage and competitive positioning, by using independent

contracting factories to manufacture their products. This great idea of outsourcing was

one that Nike’s CEO Phil Knight had come up with, however, it did not materialize into

the success story that he thought it would.

Nike chose to outsource to not only developing countries but to countries with

very low costs. This meant that the average worker was making next to nothing to

produce Nike’s products compared to what it would cost Nike to produce their products

in other areas of the world, let alone in their home country the U.S... As the case states

they were mainly outsourcing to Indonesia, where wages were vary low and workers

were docile. (Bartlett et al, 2008). Even though there were unions present and some

protests, the Indonesian government was happy to host Nike. In this country the daily

worker wage rate was between one and two dollars, compared to other developing

countries Indonesia wages were about 50% less. Some organizations and consumers were

outraged by Nike’s labor practices, with media reporting on very low wages, child labor,

unsafe working conditions, and extremely long working hours; Nike was faced with a

public relations nightmare. Nike is a very successful company based on such a high brand

image that one would think that they were doing everything right, but now they were

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facing allegations of labor abuse. Instead of taking responsibility for wrong doing, and

doing everything in the company’s power to make the situation right and prove to the

public that everything was fine, Nike denied all accusations and insisted that the company

could not be held responsible for the actions of the independent contractors. As the case

states Nike at this point was its own worst enemy.

Problems only got worse for Nike as a labor activist named Jeff Ballinger set out

on a mission with Nike as his main target. He was determined to prove Nike was in the

wrong and make them do something about it. With all the added negative media that was

generated in response to these issues, Nike issued and employee Dusty Kidd to fix the

problem by drafting up some regulations and a Code of Conduct for the companies

contractors to operate by. However, after many failed attempts to patch things together

and make things right with the media and the public, Nike was still seen as a company

that did not care about their workers or their rights. This led to the company’s first loss in

13 years and Nike was forced to issue a large layoff, in addition to profit losses Nike’s

brand image took a huge hit. Towards the end of the case Nike had come to terms and

resolved some of the impeding problems, but they still never addressed the issue of the

low wages and many critics did not believe that telling the full truth. In addition to this

issue there could be future issues that could arise because of their questionable business

practices, they could have a hard time obtaining celebrity spokespeople and/or sponsored

sporting events, many college universities could not want to buy their sporting goods

from them anymore, consumers could buy other brands like Reebok or Adidas, and

stakeholders could not support the company. The main problem here is Nike needs to

find a way to fix the current problem at hand, and learn what they can do in the future so

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not to make the same mistake twice. Nike also needs to decide if they are going to

continue to outsource their manufacturing to developing countries like Indonesia or if

they are going to move manufacturing to their home country.

Solution Generation

There is nothing Nike can do at this point to go back and fix what has already

happened. They need to address the wage issue and educate the public, as well as

themselves, more about the countries that they are manufacturing in and how they differ

from their own, from there they need to look ahead to the future and figure out a course

of action so this type of incident never happens again. One of the biggest mistakes that

Nike made when dealing with the labor abuse situation, is in the instance when this issue

was publicly brought to their attention and they were questioned about the overall

manufacturing situation. Instead of addressing the problem that the pubic was so

concerned about they decided the best thing to do was ignore the situation, or simply say

that the issue was beyond their control. However, if they had done more company

research on the countries that they were thinking about doing business in before they

entered into them, they might have known some facts that they could have educated the

public about, for example how the host country differs from the company’s home

country, as well as, other countries. They could have become more educated about the

host country by appointing a team to conduct the eight-facet model for analyzing country

environments as mentioned earlier. This would have given them more of an idea about

Indonesia’s resources, income distribution, population, laws, government stability,

attitudes, beliefs, religion, education, societal structure, composition of labor force,

mobility, labor unions, and diversity. By conducting this research Nike might have been

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able to find out the data that the Dartmouth students found, showing that “economically

companies like Nike were actually furthering progress in the developing countries,

providing jobs and wages to people who formerly had neither.” (Bartlett et al, 2008). Its

facts like these that they could have used to formulate a data supported argument against

the allegations that were made about the company.

Another solution was one that was mentioned in the text, if a company plans to

play the “global chess” game like Nike was trying to do, then they needed to make sure

that they were managing their worldwide operations as independent units, which they

were somewhat, but they also needed to make sure that they implemented a coordinated

global strategy. (Bartlett et al, 2008). It seemed like Nike just wanted to outsource the

manufacturing and not have to worry about it, they did not appoint a team to really

oversee the manufacturing process and left it up to the contractor to oversee the operation

and how it functioned. This method of operation left Nike in the dark to what was really

going on in the manufacturing plants and how they are treating their workers. This shows

that Nike is not really functioning as a multinational corporation when it comes to their

manufacturing operations; they need to employ a multinational management team that

can work on meshing corporate strategy with the host country policies and practices,

working closely with global operations instead of being more of a contractual based

operation that never checks in on its operations. To become a multinational industry Nike

needs to develop a more effective multinational strategy, which means that they need to

be sensitive to the local markets and build strong resourceful national subsidiaries that

will ultimately help generate the business to flourish. (Bartlett et al, 2008). From there

they can strive to develop an international strategy, which I think that they have obtained

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through their product sales, but they need to concentrate more on the way they run their

business. In relation to Nike’s manufacturing operations I kind of see their company as

one that has moved from the more international perspective to a multinational

perspective, but one that needs to move more into the global and transnational

perspective. I do not think that their sales operation is in the same realm as their

manufacturing operations, I think this is more of an area that is overlooked, but they need

to consider how they are going to achieve sales with the public viewing their company as

one that is not operating under ethical and fair labor standards. However, if Nike worked

under more of a global perspective with their manufacturing operations they would

operate globally more as a single unit, instead of individual branches that are not

overseen by the company itself.

Nike needs to become better at managing their global operations they

seem to be focusing too much on some aspects of the company while ignoring more of

the important and key branches of their operations. Without a product Nike is not a

company and no matter what type of marketing campaign they can not generate sales

with a product that is tied to non-ethical labor practices. To insure that they have a good

quality product Nike needs to make sure that the people making their products are well

taken care off and are seen as important stakeholders in the company. To do this Nike

needs to focus on developing more of a basic classic internationalization process

approach, this is kind of going back to the basics but it insures that the company is in the

process of increasing their commitment and understanding of the foreign markets that

they do business in. They also need to focus on such underlying aspects as organizational

complexity and diversity; they need to realize the issues that may arise when doing

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business in another country and the sometimes complex demands across barriers of

distance, time, language, and culture. (Bartlett et al, 2008). If they concentrate on these

things in the beginning they are more prepared to deal with issues like bad publicity

because they know the foreign environment and can develop an argument that shows

facts that appose the accusations. Nike has a lot of work to do pertaining to their

manufacturing operations, but they are a large successful company that will continue to

prosper once these issues are addressed.

Solution Choice and Implementation

I do think that Nike should continue to do business in developing countries like

Indonesia and use them as a resource for cheaper labor, but to do this successfully the

company needs to develop more global awareness of their operations abroad. The

solution that I would say would be the best one at this point is to admit their entire

wrongdoing in that they were not aware of their manufacturing operations problems, and

they will do all they can to fix the problems. In addition, they need to go on to work with

Indonesia to improve their economy and make working conditions better for all workers

in the country. Nike started to take this route towards the end of the case but unlike

Reebok they did not really act on the situation in a timely manner. However, the more

involved Nike becomes in improving all working conditions around the world through

direct investment and also involvement and donations to organizations, the better off

Nike will be in regaining their brand image and good global corporate citizenship title.

These actions in turn will lead to increased sales and profits that can be used to support

the programs they are sponsoring. As a company they seemed to ignore the fact that good

marketing can only go so far, and spending extra money in that department was maybe

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not needed. They needed to become more of a company that is moving toward the

transnational perspective and one that is educated about all foreign environments that

they do business in. As well as, a company that works closely with their contactors to

make sure that the Nike Company upholds its commitment to all its stakeholders, and in

doing this shows a high value and regard for their entire workforce. Overall, Nike needs

to increase their global awareness beyond the cheap labor, to become a more committed

company that understands and oversees all their operations domestically and globally,

and by doing this they will move toward becoming a more successful global operation

and will be viewed positively by consumers and the public alike.

Nike needs to take many steps to implement this solution, but they are all

steps that they company is very capable of doing. As mentioned above the first step is

admitting that they were wrong and issuing a public apology. From this they need to

announce that they plan on using a portion of their profits to develop a campaign that will

be aimed at improving working conditions for the entire globe. They can develop their

own organization to help this cause, and in addition to this they can support other

organizations that support the cause. As they were starting to do in the case they need to

become a company that supports laws and regulations that support fair treatment of

workers. By doing this they are increasing the public’s awareness that they are a

company that cares about all mankind.

In addition to these changes Nike needs to evaluate their current manufacturing

operations, and improve on the situation. They have a few options here and all the

options must be looked at and evaluated before they decide the best course of action.

Before they can do all this Nike needs to appoint a team of employees and managers that

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are combined to create a global public relations/management team, instead of relying on

one person like Dusty Kidd to deal with all the problems. This team needs to do all that it

can in increase its global awareness of all the countries that Nike does business in, as well

as oversee all the operations that take place globally. To do this the group needs to work

on one of the important strategic tasks that the text mentioned is important in

multinational enterprises. The task consists of all employees in this group being able to

sense, respond, and even exploit the differences in the environments of the many

different countries in which their company operates. (Bartlett et al, 2008). At the same

time they can not become too intertwined in the global markets, they also need to re-

connect with their local environments to insure good business practices, it is like a really

big juggling act but the markets involved must be kept informed and happy. Overall, the

team needs to become aware of all the cultural differences between countries to

successfully deal with its customers as well as its workforce. After the team feels like it

has a good grasp on the foreign countries it plans to do business in it needs to present to

the heads of the company the pros and cons of outsourcing the manufacturing to

contractors versus doing more of a direct investment approach, where Nike built

manufacturing plants in developing countries to manufacture their products. I think that if

they had done this in the beginning they would have gone into the situation more

prepared, and would have been able to address the labor abuse situation and how to deal

with it before it even happened. In my opinion Nike has two options right now, they need

to either make sure that they are overseeing global contracting operations and make sure

that they develop a standard of working conditions that are followed in all plants as well

as offer incentives to workers that increase company moral, or they need to build and

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manage their own plants in a developing country of their choice. To be more cost

efficient they should try to simply manage and oversee the outsourced operations, they

could even do this by appointing an expatriate to move to the county that they are doing

the manufacturing in to be the ears, eyes, and voice of the company and the values it

upholds.

Another step in the implementation of fixing these issues is to make sure that the

company is working closely with the governmental demands of all the countries that it is

working in. As the book mentioned this can be a sort of love hate relationship, but

without managing these ties it can constrain the strategies of the company and take away

from the company’s competitive advantage. Nike needs to work with the Indonesian

government to create a set of country wide working condition standards and then help

them uphold these commitments to its workforce. At the same time they need to invest in

the country in other ways to improve on their economy and overall state. By doing this

they are evaluating the potential benefits that they can provide to the developing country

by doing business in it, and from this they can try to improve the country gaining the

respect from its people and all their consumers.

All these decisions and plans for the future will be generated by this global task

force department that is created, from here this group of people can help other

departments like marketing and sales and public relations to insure their understanding of

the other countries cultural differences and likes, dislikes, values and beliefs are known.

This could in turn help these other departments improve on their marketing campaign by

knowing what the global market wants, and the public relations department in regards to

being able to defend the company and show detailed reports when accused of

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wrongdoing. If Nike concentrates on becoming a more of a transnational company for

the future it will bring together the company globally to work as a whole eliminating the

possibility of Nike getting left in the dark about portions of their operations. As Bartlett

et al mentioned in the text, “The winners in the emerging global competitive game are the

companies that can most effectually harness their access to worldwide information and

gain the expertise to develop and diffuse innovative products and processes on a

worldwide basis.” (2008, p.97). Nike needs to move towards this style of thinking to

improve upon the current situation as well as ensure a bright future for the company.

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