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Nike was founded in 1964 with an investment of $1,000 by Phil Knight and Bill Bowerman, the expansion of the business required an advantage versus the existing athletic players such as Adidas and Reebok, hence, the founder started looking to get higher quality with lower price than the existing domestic brands. They started by making deals with Japan factories when the product cost was low comparing to the US. However, after several years and due to oil crisis in Japan the prices started to go up which forced the company to look for alternative locations. They started going to other Asian countries like as Korea, Taiwan, China, India, Indonesia and Vietnam and they are still exist in some of these countries till date. Nike had followed very clear and direct strategy, they just focused on the development, design, marketing and sales, and outsourced the production of their products through several manufacturers. From the first sight, it looks a very creative way to manage the business and have focus on their specialties, this is also known as the outsourcing or offshoring model for such huge organization where controlling all areas is quite difficult. Although this move has certain advantages, yet it had led to a very crucial and negative circumstances for Nike (I believe this would happen to every branded product or services, because the light is often shed on them).
The first major issue faced by Nike is the low wages in Indonesia in the early 1990s. Nike were producing their products in six factories in Indonesia, some of these factories were paying wages at very low rate (lower than the legal minimum which was around $1). Even worse that the factory itself had obtain a permission from the authority to make such low wages with a claim of high expenses. This had gone to public through non-governmental organizations (NGOs) after four years of inspection by Jeff Ballinger (the founder of Press for Change). Looking to the share trend of Nike there is a clear impact on the sales dropping at the early 1990s. Initially, Nike started defending that they are merely the designer and marketer of the product, but it seems this did not take them away from the light of the incidents. Then, in the mid of 1990s, Nike started giving instruction to their supplier in Indonesia that they have to maintain the minimum wages and stop approaching the government for get any exemption. Nike has gone even further miles by raising the wages to be between $30-37 when the government announced the minimum wages in 1999 to be $26. The second issue Nike faced is in Pakistan due to the Child Labor in Pakistan, Sialkot. This area produces more than 70% of the world’s high quality soccer ball and Nike produces their soccer ball in this area as well. In 1996, Life magazine published an article about the child labor in Pakistan with some photos that include a photo for a 12 years child stitching a Nike branded soccer ball. This article and the 12 year child’s photo made the situation even worse for Nike (in addition to the previous one). Criticism followed by several NGOs, consumer groups and trade unions to boycott Nike against such behavior. To overcome this issue, Nike insisted that if any of its contractors employ children for their product, they will be forced to remove the child from the factory an keep paying the child the wages as well as the school fees until the child reaches a legal working age.
Lastly, the issue with Health and Safety problem in Vietnam. During the same time of above cases (specifically in 1997), an auditing and controlling organization hired by Nike to perform an audit in one of the factories in Vietnam, however, the audit report was leaked to one of the NGO which highlights a very serious health and safety problem at the factory which was operated by Nike’s Korean subcontractors. A certain chemical called Toulene were exceeding 6 to 177 times above the acceptable standard in some area inside the plant. Such excess of this chemical material could lead to serious diseases and damages to the nervous system, liver, kidney and various skin and eyes irritations. In addition to the level of Toulense, the protective personal equipment were not provided to the workers, and the working condition and time was violating the Nike’s code of conduct.
All the discussed issues were like a shock to Nike in the first place and they have refused to take any responsibilities in the beginning, however, it also was a learning journey for them. In 1992, Nikes started releasing their code of conduct to their supplier and instruct them to adhere to it and observe the basic labor environment and health standard. Nike also started making new departments and building new times for certain functions such as Nice Environment Action Team (NEAT), and Labor Practices. They also started making training for their supplier to ensure increase in awareness for safe, health, attitude of management, people investment and environment. They have built an incentive system to reward their managers and suppliers, and increased the monitoring of its supplier.
In addition to all these correction for their internal systems and procedures, they also have made relations with the international association and NGOs. The expansion strategy of Nike is very creative and helped the company to ensure lower cost and higher number of facilities to increase the supply versus the increasing demand, so as a positive impact for Nike, they have made hire profit (economical impact) and also higher supply. However, this had led to huge lose in control of the operations. Although the rectifications done by Nike has improved the situation and avoided further harming to their brand, but in my opinion, they could have avoided this if they went with a partnership relationship with the supplier by taking share of the factories that give them the authority and rights to manage the way the plant operates.
In conclusion globalization was a learning journey for the management in Nike, and I believe by now they have enough knowledge and experience in how to approach their suppliers in new countries with clear code of conducts and standards.
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