Nike supply and demand analysis

RUNNING HEAD: NIKE 1

Nike 20

Nike

Anita Orzel

Southern New Hampshire University

October 9, 2016

Purpose of the Paper

The aim of the paper is to apply the microeconomic models in the functioning of Nike to ensure that the firm undertakes effective business decisions. The paper will focus on analyzing the history of the Nike Company since its existence until today and evaluate the supply and demand conditions that Nike encounters in the sale of its products. Further, the paper focuses on the price elasticity demand by analyzing the available information that can affect the customer’s responsiveness to purchase their commodities (Distelhorst, Hainmueller, & Locke, 2016). In addition, the paper will discuss the cost of the production by analyzing the cost incurred by the Nike Company in the production process and explore its market performance to ensure that higher profit is generated. This can be done by avoiding and addressing the barriers that are encountered by the company in the marketplace. Finally, the paper will provide effective recommendations that are required to be addressed by the company to manage its future production. This is essential to ensure that the firm achieves its set goals through the evaluation of the demand trends and the price elasticity (Distelhorst, Hainmueller, & Locke, 2016). This paper, therefore, seek to critically analyze the history of Nike and the current information regarding the goods and services traded by the firm as well as the area of Nike’s operation to ensure effective decisions are made by the firm.

The history of Nike Company

Nike Company aims to ensure that it brings inspiration and innovation to the wide range of athletes in the world by providing them with athletic kits and sporting equipment (Chang & Ko, 2013). One of the most important aims of the firm is to make a profit and ensure growth in order to keep its stakeholders happy and in turn meet the customers’ requirements. Nike is a multinational firm that is involved in the designing, manufacturing and the development of footwear, kits, clothing, accessories and services. The firm was originally known as the Blue Ribbon Sports (BRS) that was founded in 1964 by a distance runner Phil Knight and his coach Bill Bowerman. Nike foundation was aimed at enhancing the performance of trainees in sports by improving their sports kits such as shoes to supplement the heavier kits that were viewed as a burden to trainees during their training sessions. The firm initially operated as a Japanese shoe distributor that facilitated its sales and enhanced profit due to the lower retail price as compared to the other German products (Distelhorst, Hainmueller, & Locke, 2016). The sale of Nike’s brand has improved over the years and its ‘swoosh’ logo is recognized across the globe. The firm has been signed by various organizations to design their products. The firm has seen a rise in its popularity over the year and has shifted its focus to various nations across the world and not only focus on the United States and Japan. This, in turn, has helped the company to break new records through its sales in the global setting (Chang & Ko, 2013). The company has moved to the designing and manufacturing of kits among other cross-training accessories that has led the company being signed by the international football teams such as Brazil football team and U.S men’s and women’s soccer teams.

Its headquarters is in Portland, United States of America. It is a public limited company traded in New York Securities Exchange (NYSE) as Nike Inc (Banjo, 2014). It designs and manufactures footwear and apparel products. Besides, it involves in active marketing and sales of these products worldwide. It has several stores that enable act as its distribution centers. Some of its major stores are established in Portland USA, Vietnam and China. It derives major sales revenues from the sales of sportswear. As such, it’s the world’s leading supplier of sportswear with over 44,000 employees in 2014 (Banjo, 2014). This paper analyses various costs that Nike incurred between 2012 and 2016 financial years and explores the market share of Nike against its major competitors in the footwear market.

Supply and Demand Conditions

Nike Inc. is a US based athletic footwear and apparel company, which has its stores in more than 50 countries around the world. This section is going to discuss the supply and demand conditions in case of this company. This section will evaluate the trends in demand over time for Nike footwear products and will explain its impact on the industry as well as firm. Similarly, the analysis of data concerning demand and supply of the firm’s product for recommendations will also be proposed in this section.

Evaluation of Trends in Demand over Time and their Impact

In 2015, it was reported that Nike Inc., the leading brand in the world for apparel and footwear, had experienced a 16% higher demand for its shoes. The company experienced higher margins while selling shoes to customers around the world. The demand in 2015 had been seen on the increasing trend, which went on the same even in the first two quarters of 2016 (Fox Business, 2015). The analysts have also predicted that future orders’ demand will further rise by 9% for Nike footwear products. Such demand has not only been strong in United States, but it has been so in other parts of the world too, such as Europe, East Asia and Australia. Over the period of time, the company through best performance, sustainability and innovation is meeting the consumer demand. This innovation and improved performance have also contributed towards the gradual rise in demand of the company’s products around the world. The graph below shows that the year 2015 had experienced a massive rise in demand of Nike products.

When we look into the annual income records of Nike Inc., we see that income has been increasing annually with a variable percentage. The rise in annual income does show that there has been gradual rise in demand for Nike footwear products, which also shows that the market share of this company has been on the rise for the last few decades. Similarly, price of related goods produced by Nike has been increasing, and this increase is both due to the price increase in raw materials and production cost as well as the rise in demand. The consumer tastes have also developed up to a larger extent and Nike has been manufacturing versatile footwear products in order to accommodate the higher demand of its shoes. Similarly, the rise in population around the world and the company’s subsequent expansion have also led to the consideration of this fact that people are demanding the Nike’s footwear products more. Apart from that, the manufacturing efficiency of the company has also led to the accommodation of greater demand of Nike’s products. In this regard, company’s expansion and overseas manufacturing have also helped the company in meeting customer demands. The impact of this rise in demand in case of Nike Inc. has also been great, as the company has been able to maintain its position as the leading footwear brand in the world.

Recommendations for Firm’s Future Actions based on Supply and Demand

In the recent times, the economy on the global scale has slowed down. Due to this, the consumer purchases are also down. In this respect, over the last few years, the major threat for Nike Inc. has been the economic recession. The economic crisis in Asia has also mildly affected Nike’s business, because the Nike’s products are mainly manufactured in Asia. This is in turn because the material prices and labor costs are increasing. Additionally, not only the local economy is affecting the growth of this company, but also the international economy has not been so kind over Nike’s business. Therefore, a weaker global currency and recession in Asia would mean weaker sales for Nike.

However, it should be noted that the footwear industry is quite old, so the companies in this industry have been more focused on grabbing the most market share rather than having more market growth. The graph shown below will highlight the largest market share of Nike Inc.

The competitive strength of Nike is also due to the significant recognition of its brand around the world. Based on the past data, it can be said that the supply and demand of Nike is represented by a downward sloping demand curve and upward sloping supply curve (Waddock & Rasche, 2012). Over the past years, the product influence of this company has increase amid emergence of the major sports events in different parts of the world. Due to these sporting events, the popularity of the company has increased quite significantly and it has also permitted the company to establish as well as maintain high prices for its products.

Based on these facts and analysis, it is recommended that Nike Inc. should produce the quantity where its supplies are limited enough so as to keep the prices higher. One example of this suggestion is that when the company will release a new shoe product, the production will be made at a high price so that customers will anyway be interested to buy that. This tactical strategy will help Nike use its influence for maintenance of its profitable production in the future as well.

Examination of Price Elasticity of Demand for Nike’s Products

Determination of Price Elasticity of Demand for Nike’s Product

Price elasticity of demand is generally defined as measure of the relation between a change in the price of product and change in the quantity demanded of the same (Hubbard, & O’Brien, 2015). This is also used for the evaluation of price sensitivity. It also determines the measure of responsiveness of demand to the change in price of a product. Based on the past data, it can be seen that the price of the Nike’s footwear products has been on the rise. There has been a gradual rise in the price of Nike footwear products. Similarly, amid several factors, the demand for Nike’s products has also been rising even when prices are kept high. Although there are substitutes available to the Nike’s products, but still there has been a higher demand for the Nike’s products. It can be said that the price elasticity of demand for the case of Nike is less than one. This is also because the change in quantity demanded for Nike’s products is smaller than the change in price maintained or kept by the company for its footwear products. This is also because the company has a fixed market share and which is more than any other company in this industry. This is why the Nike’s products are not substituted much by the consumers and therefore change in demand is not much. So the price elasticity of demand for Nike can be considered as less than 1.

Factors Affecting Consumer Responsiveness to Price Changes for Nike’s Footwear Products

The pricing decisions are very important for the companies such as Nike Inc. The main reasons for this fact are that pricing is one of the most significant parts of marketing mix, which also brings the revenue for company. Similarly, for the case of Nike, once it has set a price, then the customers will demonstrate a higher resistance for any attempts of change in price. Price also has an important implication for the product positioning.

Based on these facts, we can say that demand curve of the company’s products is downward sloping. This mainly shows that the consumers will likely to have lesser demand of the product when the price is going up. Since the price elasticity of demand for Nike Inc. is less than 1, so the customers will still be highly responsive to the products of the firm even when prices are raised. One factor that will affect the responsiveness of the customers to the changes in price would be that when the company does not release new products. The customers have always been impressed with innovative footwear products that Nike introduces every year. Similarly, most of the products of the company are region-specific. If the quality of the products is not high, then the customers will not be interested in buying the products of this company. In addition to that, the customers will also not be responsive much to these price changes when the substitute products are for sale in low prices and have higher quality.

Assessment of Impact of Price Elasticity of Demand on Pricing Decisions and Revenue Growth of Firm

In business economics, it is often heard that the price elasticity of demand has a great important for pricing decisions. In case of Nike Inc., the price elasticity of demand of less than 1 shows that consumers are least bothered by the manipulations in the price of Nike’s footwear products. From the Nike’s point of view, price should demonstrate a clear reflection of the production as well as advertising costs that are included in bringing the products to the market place. When we talk about the impact of price elasticity of demand, it is known that the Nike Inc. will have to take it into consideration before increasing the price. The less than 1 price elasticity of demand for this company will be true to some extent to which the price can be increased. However, the company should stop increasing the price, or maintain the fixed price, or it should decrease the price when in future the price elasticity of demand becomes more than 1 or becomes zero. This situation means that the customers are already not much responsive to the company’s products after price changes and further change in price will mean the decline in the product’s demand. Therefore, the company should make sure that the price elasticity of demand is less than 1 when price change decisions are to be made. When the price elasticity of demand is more than 1, then it will badly affect the Nike’s price decisions. Similarly, it will also affect the revenue growth of the firm if price decisions are not taken with respect to the value of price elasticity of demand.