Nike Global Business and Challenges

Once a company, like Nike, decides to become a global entity, it will often
experience an increase in profitability. Unfortunately, companies like Nike must
overcome some difficult obstacles before establishing a successful business in a foreign
country. Some of the issues of concern are child labor laws, wages, and outsourcing’s
effect on sales. Because of this, most widely known companies have presented various
cases to defend their positions on conducting business in the foreign country. One such
example is a Nike sweatshop labor case that stirred up a large amount of controversy
over ethical business practices. Even though Nike has attempted to recover from the
bad press it received about the sweatshops, it still struggles to defeat the negative
feelings from people across the United States. Thus, a summary of the case, the legal,
cultural and ethical challenges, an understanding of the roles the host governments
play, and the strategic and operational challenges faced are important to gain a
thorough understanding of the issues and case.

    Most people could easily define Nike and are familiar with the products offered,
like the customized options available in the Nike store online, Nike Sportswear, Nike
Women, Nike Basketball, and Nike Football. These products, among others, have led
Nike to a profit of $15 billion in 2006 and a catchy “Just Do It!” slogan (Hill, 2009). The
company outsourced its manufacturing plants to several countries in order to lessen
costs and become more efficient in productivity. The outrage and protests that followed
were far from what Nike expected; the company was labeled as forcing “children to
slave away in hazardous conditions for below-subsistence wages” (Hill, 2009). As a
result, protestors of globalization and human rights activists criticized Nike for taking
advantage of the workers overseas and placing them in a destructive working
environment. Moreover, the fact that Nike was making billions of dollars and still failed
to provide a safe working environment only made matters worse. After Nike realized it
was the target of several protests and complaints against globalization, it recognized the
need for safer work environments and an adherence to certain standards for each of the
overseas factories. The factory workers were forced to work exceptionally long hours to
fulfill quotas and had to follow strict rules during work for below minimal pay despite
having “77 percent of the employees in Vietnam suffer from respiratory problems” (Hill,
2009). Therefore, the legal, ethical, and cultural challenges began to add up for Nike
and it was time for the company to confront them.

    The majority of challenges Nike had to overcome involved ethical issues and
debates. Even though Nike was providing jobs to those who may not otherwise have
one, it was paying “a mere $1.60 a day to Vietnam factory workers when the living wage
is at least $3 a day” (Hill, 2009). Nike could have avoided this challenge by paying each
employee worker the living wage of the country he or she lives in to purchase necessary
items. Moreover, the living wage is a cultural expectation which Nike failed to meet that
led to protests. Another ethical issue involved “a report that found workers with skin or
breathing problems had not been transferred to departments free of chemicals and that
more than half the workers who dealt with dangerous chemicals did not wear protective
masks or gloves” (Hill, 2009). The debate was over the unsafe conditions Nike was
providing its factory workers while it experienced continual increase in profits. Nike was
also criticized for failure to follow child labor laws by hiring children who were not
allowed to work and forcing them to work overtime for below minimal pay. For example,
“according to Global Exchange, in one factory, owned by a Korean subcontractor for
Nike, workers as young as 13 earning as little at 10 cents an hour toiled up to 17 hours
daily in enforced silence” (Hill, 2009). Exposing workers to harsh and toxic chemicals
including carcinogens were also factors that placed the company at odds with human
rights activists. The company attempted to redeem itself by stating “it had formulated an
action plan to deal with the problems cited in the report, and had slashed overtime,
improved safety and ventilation, and reduced the use of toxic chemicals” (Hill, 2009).
Even though Nike took steps to improve the accusations in the report, it should have
been corrected once it was aware of the conditions and provided each worker with a fair
and safe work environment.

    Ernst & Young was the accounting firm hired by Nike to conduct an audit of its
business practices; however, the discovery became public knowledge instead of
remaining confidential. Another host government that played a role is “one-time hired
U.S. Ambassador to the United Nations and former Atlanta Mayor and Congressional
representative Andrew Young”; his role was to “assess working conditions in
subcontractors’ plants around the world” (Hill, 2009). Unfortunately, there were
accusations made that stated discrepancies in his report and the method by which the
report was conducted. Moreover, “Nike joined a task force called Fair Labor Association
to assess whether companies are abiding by the code and banish sweatshops in the
shoe and clothing industries” (Hill, 2009). The debate over independent auditors
performing audits of overseas factories came from the “United Students Against
Sweatshops to ensure a truly independent audit” (Hill, 2009). Nike is a widely
recognized brand, which is the reason several other host governments became involved
in the sweatshop case.

    The strategic and operational challenges Nike faces are vast and will require a
large amount of time and effort. This is especially true because the operational practices
and strategies Nike previously adhered to was no longer effective; rather, those
practices began to hinder its success. One operational challenge Nike faces is the
development of a strict monitoring system in its factories overseas. On the other hand,
hiring a firm to ensure accurate accounting reports are produced is a strategic
challenge. Moreover, determining a country to set up another factory in is both a
strategic and operational challenge. Nike faces several challenges; however, it can
achieve continual success through an effective operational and strategic plan.

    Therefore, the factories and sweatshops established overseas by Nike launched
a debate regarding whether Nike was in compliance or violation of ethical guidelines
and regulations. Despite several attempts, Nike is still the focus of protests regarding
violation of child labor laws and unsafe working environments. Moreover, numerous
governmental organizations have worked with Nike to ensure safe and ethical business
practices and to monitor the sweatshops Nike established overseas. Consequently,
Nike was forced to change its operational and strategic plans drastically in order to
remain successful and appease labor and civil rights unions. The case of the Nike
sweatshops demonstrated how difficult it can be for a business to become global
because of the different rules and regulations established by that country. 
 Foodrich Philippines Inc. (FPI)*

Atty. Lemuel Esmero, Chairman then President, sat down with his management
team, which includes Mr. Lorenzo Nayve, new President, to review the current situation
and map out their strategies. Esmero felt that he is already too old to manage and
worried about of the company the remaining years to realize the vision of FPI; hence, he
personally recruited Nayve to lead the Foodrich Philippines Inc. because of his hands-on
experience about the needs and wants of the market. Nayve was the Chief Operations
Officer of Fidisco Biscuits and turned the company from near bankruptcy into one of the
most profitable companies in the Philippines.

Nayve found the opportunity attractive for a number of reasons.

First, with an improving economy, Filipinos have more money to buy the food they
want and where they get them, if offered with more choices. The increasing level of disposable
income and changing lifestyles of most Filipinos have been the main reason for their steady
integration of dining out way of life. As reported in the papers, food is the Filipino family’s main
expense comprising of 50.45% and 54.65% of the total family expenditures in 2003 and 2006,
respectively.

Second, the new market segment -- higher number of sickly people due to high intake
of sugar and cholesterol -- means that there is a substantial market for health conscious
individuals. This segment has not yet been tapped to any considerable degree.

Third, Esmero is willing to extend capital outlay even reaching the point of selling some
of his prime properties located in Cebu, Baguio, Tagaytay, Bukidnon and Davao.

Fourth, the consolidated net sales when compared to last year hit P2.5 billion,
representing a growth of almost 48 percent. The strong sales growth could be attributed to
upsurge orders from Japan, Thailand and South Korea. Net profit margin for 2006 stood at 5.5
percent, a little higher than the previous year’s level of 5.2 percent. However, Nayve felt that
there are still more works to be done and he wondered how to deal with Esmero’s desire to
realize value so soon.

The FPI was organized in 1997 and is the umbrella organization of seafood supplier and
restaurant. It intends to branch out to pig raising business. Its vision is to be the principal food
provider in Asia in the next 30 years.
Seafood Supplier

Searich Fishing Corp (SFC) is one of the companies owned by FPI that provides ready-to-
cook Tuna, Blue Marlin, Crabs, Lobsters, Shrimps and other seafood. The company is
successfully supplying seafoods in most restaurants in Metro Manila. As such, international
expansion began in 2005, realizing the greater demand in Japan, Thailand and South Korea for
the seafoods.

Reeling off from the seafood glut in 2001, it seemed like the company and the rest of
the industry was on its way out of the doldrums. Measures initiated in the last quarter of 2000
to mitigate the effects of the glut on higher ingredients cost were taken by the company, which
included cutbacks in production, downsizing of personnel, and sale of non-performing assets.

During the first six months of 2001, with supply and demand almost in equilibrium,
seafood prices began to improve. Profitability was further boosted by lower direct costs and
restored efficiency in operations. By the end of the 1 st semester of 2007, SFC was able to realize
a net profit of P500 million, from the year-ago deficit of P100 million.

Restaurant Business

The first Tita Maris Seafood (TMS) restaurant opened in September 2002 along Roxas
Boulevard in Malate, Manila. Its tag line: “Fresh from the Sea.” The company’s mottos are: 1)
Treat our guests the way we want to be treated, and 2) Guests are the most important persons
in our business.

The company enjoys a favorable market position because of its reliance on old
established customers. Some customers are being contacted thru phone and pick-up their
orders with their own transport. Hence, less sales force is necessary and TMS is afforded a cost
advantage. More outlets were opened in the 2004 at various strategic places such as Dampa in
Macapagal Hi-way and Sucat, Paranaque; and Tiendesitas in Ortigas, Mandaluyong.

In 2005, the restaurant’s sales reached P950 million. Louie Rigayen, VP-Marketing of
said restaurant reasoned out that they were able to capitalize on the opportunities created by
population growth coupled with increased mobility. TMS now holds the top 10 spot in the
seafood restaurant industry. However, the TMS’s 2006 performance reports show a marked
variance between the forecasted sales and the actual sales of the month. Poor sales forecasting
can lead to lost sales due to being out of stock, overly large inventories and costly price
markdowns. Stock outs of the most saleable items result in permanent loss of sales. Poor
inventory control and sales forecasting systems disappoint customer expectation with regards
to delivery and service and risk the cost of locking up in merchandise, which might spoil,
become obsolete or otherwise deteriorate.

Acquisition of Betarich Piggery Farm

As fruition to the vision, Esmero is contemplating of acquiring the Betarich piggery farm
of Cecille Capul through equity swap. Cecille offered her company because she lost her self-
esteem in managing the business after the production of pig meat in 2002 to 2004 significantly
decreased due to foot and mouth disease, high production cost and calamities. Further, the
buyer dictated prices of market hogs especially if there was an over supply.

For Esmero, the pig raising is generally promising in the Philippines since it registered
almost 10 million of pig population as of 2006. He intends to sell live pigs and fresh pork in
wholesale and retail bases. Discounts shall be offered to attract and encourage customers to
patronize the products. Esmero believes that the returns of pig production will come very
quickly as it does not require expensive housing, equipment and labor requirements as
compared to dairy and poultry production. The acquisition would cushion a possible market
decline for seafood products.

During their planning, the following items were noted:

 Changes in Market Conditions

o Market size. Philippine population posted a growth rate of 14% from 2000 to 2007.
In the face of this reality, FPI has not expanded its product lines and has not changed
its distribution policy to cash in on the opportunities presented by an expanding
market.

o Entry of competition. Due to its favorable market position, the entry of new players
might not present immediate threat to FPI. However, the market leader in seafood
industry is now selling to more than 15 countries worldwide, almost 5 times bigger
than FPI. Market intelligence revealed that a competitor has been proactive in
searching for new markets in Asia, Europe, and Middle East. This has helped them
expand their marketing reach and eventually higher sales.

o Rising prices of goods would increase the cost of production and logistics affecting
the company’s profits and tighten cash flows because of the need to purchase store
equipment, construction materials for the outlets and transportation vehicle.
 o Rising costs of real estate and property development could hamper the expansion.
Apparently, the lease payments for some branches will go up thus, increasing the
operational expenses.

 Despite 10 years of food business operations, its main product line has remained the
same and chose to limit its advertisement in radios and through flyers.

 Nayve pondered the importance and heavy reliance of cash sales transactions in food
businesses since this is the life-blood of its existence. He thought that the FPI is not
properly monitoring the cash flow, which may lead to inefficient cash flow management,
and eventually bankruptcy. The cash of TMS is at times being used in the purchase of
seafood products to supply in other seafood restaurants in Metro Manila and Cebu.

 For Nayve, the most challenging assignment is reshaping the culture of FPI. Employees
are neither highly motivated nor well-rewarded taking into consideration the following
aspects:

o Management style is highly informal that old employees feel superior over the
new ones.
o Lack of effective communication system because most of the concerns are being
raised directly to the President without observing protocol.
o Performance evaluation system for all the companies is ineffective since
targets/tasks, quotas, procedures, and process are not alike.
o Rewards and recognition system are not in place.

Esmero was explaining his organization arrangements to the new management team of
Nayve (organization chart is shown in the attachment). When asked by Nayve whether he
thought he had too many people reporting to him, Esmero replied:

“I do not believe in the traditional principle of span of control that

managers should have only four or five people reporting to them. This results in
waste and red tape. Because all my subordinates are good people and know
what they are doing, all can reach me readily with their problems. All feel close
to the top because they are close to the top. I treat them like my family members
resulting in a sense of belonging especially to the employees who have rendered
long years of service. Moreover, I want to know firsthand how every person is
 doing and detect any weakness or errors as soon as possible. Furthermore, if a
store manager at Tita Maris can have 30 to 35 persons reporting to him, I ought
to be able to handle 24. In addition, too few reporting to a manager doesn’t give
him enough to do, and I assume that you hired me to give the company my full
time.”

Financial Resources

To catch up with the competition, the FPI need at least P10 billion to finance the
acquisition of Betarich Piggery and business expansion for seafood products in Asia. Angat and
Lumpia Shanghai Banks are willing to extend loan facilities only up to the extent of the referred
collaterals. However, 60% valuation of the personal properties by San Jose Appraisers on June
30, 2007 of P4.2B is not enough.

Appraised Value (in 60% Loan Value (in

Type of Assets millions) millions)

Land 3,500.00 2,100.00

Buildings 900.00 540.00

Other Land 600.00 360.00

Improvements

Machinery & Equipment 2,000.00 1,200.00

Total 7,000.00 4,200.00

Future Outlook

There is a consensus among industry players that 2010 will be difficult for business due
to political and economic instability. It is anticipated that high raw material prices and tight
financial and supplier’s credit will continue to put pressure on supply, while consumer behavior
will reflect the reduced buying power of the middle and lower classes.

Thrusts towards further liberalization and stiffer competition push food businesses to
adopt latest technological advancements creating new products and services. With more
information made available to the public, clients have become sophisticated and discerning in
the way they spend their money.

Reports said that by 2030 if unable to seriously address the siltation and sedimentation
of the water ecosystem due to deforestation, mining and other human activities, the country’s
fishery resource will be depleted. Besides bringing in poisonous and toxic substances into the
water, silts and sediments will lead to the shallowing of the riverbeds killing phytoplanktons
and other aquatic organisms, which are responsible for photosynthetic activities.
Photosynthesis, aside from making up the food chain process, supplies the oxygen requirement
of fish as well as the rest of living organisms in the ecosystem.

It is also reported that by 2070 the world shall face food and water crisis due to global
warming. This is already happening from the unusual chunks of melting ice caps and rising
ocean levels. Farmers near the equator will likely suffer from falling crop yields and also
declining marine products even with minimal rise of temperature.

A confluence of these factors, together with problems brought about by several

typhoons, rising oil products due to the war in Iraq and Lebanon will underscore survival
as the primary goal of most companies in the food business.
*
Information supplied was used for Case Analysis purposes only.

Prepared by Dr. A. Errol Ybanez, Jr., GSM Faculty