This case details the missteps Nike made when it failed to respond to criticism of unfair international labor practices. What started out as a sneaker company in 1970s grew from $60,000 a year revenues to $49 million in just 10 years. This was accomplished utilizing a strategy CEO Phil Knight devised that consisted of two main focuses. The first was to save costs by outsourcing all manufacturing to low cost parts of the world. Instead of in house production all products would be made by independent contracting factories. The second tenet was to take all the money saved by outsourcing and invest it in marketing. Specifically, the money would be poured into high profile athlete endorsements to establish brand identity around the Nike name.
Most manufacturing started in Taiwan and South Korea where costs were quite low. After many years the Taiwan and South Korean economies grew and the costs of manufacturing rose so Nike urged its suppliers to move to new lower cost regions. This lead to manufacturing moving to Indonesia and China where costs were 50% less than Taiwan and South Korea.
About the time Nike moved to Indonesia, labor unrest swept through the country with the number of strikes rising from 19 to 112 in 1991. Additionally, articles very critical of foreign countries labor abuses began appearing in Indonesian newspapers. At this same time a labor activist named Jeff Ballinger was trying to make a name for himself. His goal was to draw world attention to the exploitation of third-world factory workers by rich U.S. companies and Nike was his ideal target.
Nike’s first response was that they should not be concerned and could not be held responsible for the labor conditions in the factories of independent contractors. The attitude Nike took was obviously not well received by labor activists and eventually news of the harsh labor conditions made their way into mainstream U.S. news publications.
To combat this Nike hired Ernst & Young to conduct audits of its contractor’s factories but this was largely seen as just a public relations marketing campaign. Additionally, Nike created a Labor Practices Department and when President Clinton formed a task force that created the Apparel Industry Partnership Nike was the first to join. But it was too late, all these campaigns were seen as halfhearted attempts to make things better for Nike and not workers.
The anti-Nike campaign was hitting full stride and Nike bashing reached a peak when they became the focus of Doonesbury cartoons and late night television jokes.
I believe Nike could have avoided the bad publicity and the lost sales if they would have planned their move into the international market and properly organized their business to respond to the external forces and realized that it isn’t only about them.
1. The problem.
Nike entered the international market without giving proper thought to changing their organizational structure in a way that would help them respond to new relationships with foreign companies and governments. Nike instead was completely driven by King’s model of reducing costs. What they failed to realize was total cost includes the cost of the bad publicity of being perceived as an exploiter of labor. Daft says that one of the ways to build horizontal relationships is to, “appoint preferred suppliers, establishing agreements, business partnering, joint ventures or even mergers and acquisitions.” (172.) Nike was not concerned with partnerships or building any kind of relations, in fact the only thing Nike wanted from its suppliers was low cost sneakers.
Another area Nike failed to consider was how their use of cheap outsourced labor would be viewed by their customers and how those customers would perceive the interorganizational relationships between Nike and their foreign factories. Daft explains that the institutional perspective is how…