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Nike – the winged Goddess of Victory in the battlefield is the symbolism of inspiration for every athlete to perform better and higher. It is the inspiration for the common man to meet his innate desire for athleticism and physical fitness. Nike’s brand promise of attending to every customer’s cravings desires and demands are reciprocated by the customer’s willingness to purchase Nike products. The incredible strategy of Nike is to have the best of athletes endorsing their shoes. It is a common desire for an average Joe to want to wear the shoes worn by Michael Jordan or Tiger Woods or any other sports icon. Their stores are laid out to encourage a customer to buy. Nike pulls out all stocks to ensure that customer buys.
Every sport has its own location in the store. In a Nike store, there is not just one store but a number of tiny ones well laid out and organized. The separation looks and feels logical and natural, carefully manipulated by the colour schemes on the walls and floors, which is different for each sport. The separation in the stores lends credence to the belief that every sport has its individual clothing and tickles the imagination of the prospective customers giving an excellent maze-like perception in the store. These approaches are led by fundamental microeconomic theories, and customers are made to believe that each product affects an individual customer’s choice. All these push customers to choose and prefer Nike over everything else.
One of the fundamental laws of microeconomics is that of demand and supply, which states that the price of goods or services is inversely proportional to the consumer demand, assuming all other factors being the same. This is simply the law of demand in microeconomics. This creates equilibrium between price and quantity.
When the supply of a product increases with an increase in price, it is obvious that the supply curve shifts rightwards. This pushes the prices down, thereby pushing the quantity down without an equivalent increase in demand. Therefore, if the demand increases without a suitable decrease in price, it is obvious that the prices will rise. Another of microeconomic theories state that the price of goods is directly proportional to the quantity offered by the supplier. This is fundamentally the law of supply, and Nike uses these laws of both supply and demand craftily and carefully in selling their merchandise. It is a simple process where resellers boost sales, thereby increasing demand and thereby boosting the supply.
A specific model called the Air Jordan’s are manufactured only in specific quantities, and this fuels scarcity. This eventually drives up the prices. The alteration in demand or even supply creates microeconomic relationships between demand or consumer demands for Nike products, which are proportional to the desire for the complete market to possess the product.
With the increasing awareness about the physical fitness, fuelling sales of both apparel and other sporting gear has driven up the demand, and incidentally, United States is the largest market for Nike apparel products. Nike also had an exposure at the Olympic Games, which has increased and fuelled demands for its products, not just within the United States, but also in the global markets.
The way Nike communicates with the target market, promotes demand for fashionable sport apparel as well as footwear. Nike is a market leader in the United States as well as Europe, and this is not predominant in other markets.
The celebrity endorsement for Nike also has created a demand, simply because an average consumer aspires to use those products that the sports celebrity uses, as the number of buyers increase implying an increase in demand. From the above graph, it can be seen that the demand curve experiences a rightward shift and the quantity increases from Q1 to Q2 and vice-versa.
Nike made a smart move of moving their manufacturing facility to Indonesia primarily in an attempt to reduce manufacturing costs. They chose Indonesia over China, because China was entering into a phase of wage inflation at that time.
A combined reduction in manufacturing cost along with a reduction in resource costs increased the supply of Nike products. With a reduction in supply, the elasticity of demand also decreases. When the supply curve moves from S1 to S2 indicating an increase in supply, quantity also increases from Q1 to Q2 at the same price level. When supply decreases, the quantity also decreases to Q3, as indicated in the supply curve.
The above two examples assumed that the price was a constant factor. If price were to increase on the same demand curve, quantity also would reduce, because Nike is a substitute product with easy replacement options from other competing brands like Puma, Adidas, among others. A substitute effect exists as the rise in price encourages a buyer to be more aware of possible options of substitutes and the consumer can exercise the independence to move away from Nike and choose alternate brands. Substitution has always negative impact on the seller because consumers tend to switch brands and prefer a low-pricing brand to a higher priced brand. This stems from the fact that a consumer purchases product to maintain their living standards and that substitution effect can be observed. This is true not only of Nike, but many other consumer goods, and it also has its roots in number of other determinants like supply as well as the preference of a consumer. The above explanation is an example of monopolistic competition.
Monopolistic competition is simply a type a competition in an industry where all manufacturers produce profit maximisers and have no price-takers. It is also an industry where all the premium manufacturers that sell the product with minimal differences and they compete on determinants like price and quality. In this type of competition, the entry barriers are low and competition cannot be prevented by Nike. This is further complicated by the fact that the competitors in the arena are not restrained by government as each manufacturer is free to set a price for their product all by themselves, thereby pushing the demand curve down.
Additionally, the low entry barriers make profits unsustainable in the long-run. Further, because each manufacturer decides on the pricing by themselves, allocative or product efficiency will be achieved in the long-run. All these are determinants of monopolistic competition.
Nike can alter its production, but they have not taken the stance of enhancing their production, thereby indirectly controlling the consumer. Because of this, Nike as an organization makes profits, making the industry attractive to competition. As per the law of demand, there exists an inverse relationship between price and demand.
As supply increases, the demand falls, thus leading to lower profits, which implies that a loss making firm would automatically exit the market. An exit of a particular firm will allow competition to enhance their profits as there would be lesser number of products for a consumer to choose from. As there is no restriction on entry and exit, Nike products will continue to earn profits.
Another economic theory of essential relationship scarcity in face of limited resources and unlimited wants makes the product expensive and beyond the reach of certain segments of customers. It is at these times that wants cannot be met. The relative value of money over a period of time is far more complicated than it is. There is no single acceptable measure and economic historians use different indicators depending on the context of usage.
Most of the indices are actually the price of bundle of goods which a representative group purchases, and over a period of time, the bundle itself undergoes a change. For instance, automobiles have replaced carriages, and also new goods like apparels and sneakers are also created. The GDP impact of Nike is its consumption in a particular economy, and the sale of Nike products in a particular economy is its consumption in that particular economy.
While microeconomic factors have been influenced by external factors, creating a deep organizational impact on Nike, both organizational and business performance impact that macro-level performance of Nike. Macroeconomic performance is fuelled by numerous microeconomic factors.
Nike’s logo ‘swoosh’ has a powerful brand recall. Towards building such a strong brand, Nike spends 12% of its revenues on marketing on an annual basis. This expenditure is not only towards advertising, but also towards various endorsements that it uses for promoting its brands, and in the year 2006 it was reported that Nike owed USD 2.25 billion as endorsement fees for the various sporting icons that it used for endorsements.
Nike also used successful brand extension and moved from a pure shoe company who also manufactures apparel. This move has been so smooth that Nike has been a brand leader in both the categories for a large number of years. It also extended its offerings into sporting equipment like hockey sticks and golf balls. While the manufacturing of a good quality hockey stick has little commonality with manufacturing of sneakers or apparel, it is therefore improbable that Nike attains economies of scope in manufacturing.
Nike instead hopes to achieve economies of scope in marketing, because of its strong brand and extensive network of retailers, which gives it an extensive access to the market as well as the sporting professionals who endorse its brand.
Economies of scope in marketing are indeed powerful, which induce consumers to try an extended product-line. However, if the performance of the extended brand is not good, then the brand is at a threat of losing business.
As of the year 2010, it was reported that Nike had not achieved its dominance in the sporting equipment business that contributed only 6% of its total revenues. However, the overall Nike performance is extremely impressive because of its strong brand reputation and what it has successfully delivered to an aspiring consumer at large.
Braeutigam, D. B. (2010). Microeconomics. New York: John-Wiley and Sons.
Fanaroff, H. (2013). Nike vs. Adidas - Footware Industry. Retrieved from IES Abroad: http://iesabroad2013.blogspot.com/2013/02/Nike-vs-adidas-footwear-industry.html
Minnagao, S. (2011). In China, Fear Not Wage Inflation's Impact. Retrieved from Cai Xin: http://english.caixin.com/2011-04-26/100252511.html