CASE STUDY – EXPANDING THE PLAYING FIELD: NIKE. S WORLD SHOE PROJECT “To bring inspiration and innovation to every athlete in the world” ……….. Company Mission Statement “We want to be able to shoe and clothe young athletes of the world regardless of where they live. To do it for really difficult socioeconomic situations is both challenging and rewarding” …………… Tom Hartge, Footwear Director for Emerging Markets The words “Just make me the shoe! ” echoed down the boardroom table to Tom Hartge a 17- year veteran of the running shoe company, Nike, Inc.
Tom Clarke, president of the company in 1998, had attended the meetings, seen the presentations and reviewed the numbers related to the market potential of China: a rough gem with a booming population of 1. 2 billion. He also knew that in many parts of the world, including China, people couldn’t afford Nike’s current footwear products. Clarke didn’t want to listen to any more speeches. He wanted to hold in his hand a tangible prototype – a specialized shoe that could sell in an emerging economy. Nike’s challenge was to “expand the playing field” with a range of affordable, durable, and easy-to-produce sport shoes.
So with this command, Hartge, Director of Emergine Market Footwear, teamed up with long-time shoe designer Alex Gajowskyj, and in early 1998 began the development of the World Shoe Project, a footwear line exclusively intended for emerging markets in Asia, Africa, and Latin America. In early 1999, initial indicators were positive as the World Shoe line hit retail stores in China, as well as in Thailand, Indonesia, Malaysia, the Philippines, and other Asian and Latin American markets. In China, marketing studies suggested a growing population of sports enthusiasts and over 80 million Chinese with an annual income between U. S. 10,000 and $40,000. Further, Nike faced little competition from other major international shoe companies. The World Shoe line was manufactured in China using local materials and Nike’s existing manufacturing network, which helped to decrease import duties and other costs of production. These cost reductions, combined with a design-for-manufacture process that had a relatively small environmental impact, allowed for a relatively low-cost product for the intended Chinese segment. As another benefit, the local manufacturing and sourcing plan created jobs-and thus income generation-for local residents, who typically had little purchasing power.
The $15 retail price point held the potential to capture a huge new customer base and expand the range of Nike products offered in retail stores. However, by January 2001, Hartge was faced with a dilemma: World Shoe sales were not meeting expectations. First, Nike struggled with the concept of selling low-margin products. There was no corporate flexibility with regard to profit expectations for the World Shoes. Even at $15 a pair, the shoe couldn’t compete with lower-priced, local brands. Another major problem was the company’s limited distribution 4 infrastructure in China.
As a result, the shoes weren’t widely available to consumers outside the major metropolitan areas where Nike sold its high-end footwear. Finally, no specialized marketing or advertising plan was created for the new product line. The shoes had been placed into the company’s current retail channels with little explanation or promotion. In two days, Hartge would meet with CEO Phil Knight and his senior management team to decide the fate of the fledgling product line. Hartge wondered how to get Knight to fully support the promising concept of the World Shoe Project. China: Manufacturing Partner or Marketplace?
During a tour of soccer fields and badminton courts at a university in Chengdu, China, Hartge and Gajowskyj came to the disturbing realization that among hundreds of athletes, not one was wearing any Nike product. Athletes played sports wearing mostly worn out, inexpensive canvas shoes. The two discovered that an athlete who played sports two to four times weekly would replace a pair of shoes six to eight times annually. The few pairs of more expensive, non-canvas “Western” brand shoes sat next to piles of clothing courtside, worn only for the trip to the game and then replaced with the cheaper shoes to actually play in!
Beyond simple observation, research statistics revealed the market demand for athletic shoes. According to a Nike commissioned study of the Chinese sports market, 86 percent of the interviewees participated in some kind of “sport. ” This translated to over 1 billion “exercising people” in China. Over 49 percent of those surveyed claimed to ride a bicycle, which was also a primary means of transportation. Apart from cycling and running, badminton was reported as the most played sport in China. According to this study, 35 percent of Chinese age 10 or older played badminton at least once a year.
In absolute numbers, this translated to 336 million players, a number Hartge felt couldn’t be ignored. Exhibit 4 highlights the various sports activities of the Chinese population. Hartge saw a twofold advantage of the World Shoe project. First, it made sense from a growth perspective. But equally as important for Nike’s brand image, the initiative made sense from a triple-bottom-line standpoint. For one thing, it created more income generation in the regions where the company operated manufacturing facilities.
Second, a product specially developed for the needs of the mass Chinese market offered local consumers their own affordable product line. A New Business Model To tap into this flourishing market, Nike needed a new strategy. The traditional business model of exporting and marketing footwear to wealthy top-tier markets simply would not fit successfully with this new segment. Customers’ needs and purchasing power were different, retailers didn’t operate in the same manner as in developed markets, and production and material costs would need to be seriously re-evaluated.
In 1996, before Hartge came on board full-time with the World Shoe Project, an Emerging Market Task Force was created to develop a new business plan for entry into such markets. Their strategic mission was “to enter and generate 5 revenue by penetrating markets where Nike [was] not currently making an impact. Global in concept, local in execution”. The task force was composed of individuals from footwear, manufacturing, strategic planning, and international footwear departments. They examined the company’s current manufacturing, ordering and distribution policies, and drafted a new business model for emerging economies.
The new plan included the concepts of “local-for-local” manufacturing, product development based on collaboration with local factories, and a target market classification system to determine the proper customer segment. The World Shoe: On the Fields of Play In early 1999, the World Shoe product line hit retail stores in China and other Asian and Latin American markets. The line consisted of two basic models: the Series 100, an entry-level canvas product with a simple rubber outsole, and the Series 400, which used high-quality performance materials and included midsole “foam” cushioning technology.
The Series 100’s retail price ranged from $15 to $22, and the Series 400 ranged from $40 to $45. Sports specificity was achieved in the last production step of the Series 100. Overall shape, fit, and outsole traction were slightly modified from the basic Series 100 shoe. The shoes were then given specific names for their respective sport: Hoopster (basketball), Sportster (court shoe), Roadster (running), Kickster (soccer), Trainster (cross-trainer), and Youth Training (school shoe). Exhibit 7 illustrates shows several models. Revenue and Margin Forecast
Conservative revenue and gross margin forecasts had been created by the original task force in 1997, before any shoes were actually sold in the marketplace. Gross margins for the World Shoe line were predicted to increase from fiscal year 1999 to 2001, adding $64. 3 million to Nike’s profits. Although the overall company margin decreased by 1 percent with the addition of this project in 2001, the dollars margin increased from $80. 6 million to $144. 9 million. Challenges By January 2001, Hartge and his team had sold approximately 404,520 pairs of World Shoes to Chinese customers.
Three key issues contributed to the disappointing sales. First, organizational disincentives, including rigid profit margin expectations, ran counter to the promise of emerging-economy markets: small margins but high sales volume. The World Shoe was overpriced and couldn’t compete with the local, low-priced competition. Second, reliance on Nike’s existing distribution system restricted Hartge’s access to the intended segment. Third, no formal marketing plan existed to promote the new shoe line to current or prospective retailers, or to end consumers. Could the World Shoe Project survive?