Why are contemporary corporations forced to restructure, and how are they doing it?
How is the structure of a corporation related to its long-term competitive strategy?
What are the geographic implications of this relationship with regard to multinational corporations and transnational production?
 

In today's lecture, we will address these questions by looking at the case of Nike. (references for this material)
 

SETTING THE CONTEXT: Post-Fordism, Flexibility, and the athletic footwear industry

Before looking at the relationship between Nike's corporate structure and competitive strategy, it will help to review the changing business environment faced by large and small firms alike.  The changing business environment faced by firms in advanced capitalist economies and societies is grounded in the transition from Fordism to post-Fordism.  The chart below reviews the basic characteristics of this transition.

	Fordism (post-WWII to mid 1970's)	Post-Fordism (past two decades)
Production	large batches of standardized goods large inventories	small batches of nonstandardized goods "just in time" deliveries of materials
Labor	collective bargaining (unions) hierarchical management rigidly defined job descriptions "implicit contract" of workers' benefits between the state, business, and labor	individual contracts "team" management multi-skilling (high wage jobs) and de-skilling (low wage jobs) erosion of benefits and the growth of "temporary" labor
Technology	inflexible machines incremental innovation	programmable machines; CAD systems rapid and radical innovation
Government	macroeconomic intervention ("Keynesianism") and provision of a "safety net" regulation of industry and antitrust industry-government-union cooperation	"neoliberalism" and dismantling the "welfare state" deregulation decreasing support for unions decline of the military industrial complex
Consumption and   Markets	mass consumption of standardized goods relative market stability domination of international markets	greater demand for "niche" goods high market volatility intense international competition
Corporate Structure	vertically integrated large firms rigid corporate organization	vertically disintegrated small and medium-sized firms flexible organization; subcontracting
Location of   Production	corporate functions (R&D, production, marketing, administration) located together regional concentrations of production	corporate functions dispersed, e.g., R&D in one place, production in another "industrial districts" and agglomerations (e.g., Silicon Valley..)
Buzzwords and   phrases	standardized; routinized mass production hierarchical acquisitions and vertical integration welfare state	flexible small batch production; "just in time" distributed "downsizing" neoliberalism

The general trend over the past two decades has been a movement from a "standardized" to a "flexible" economy (Stutz & deSouza, pp. 358-361).  Many exceptions can be found to this conception of how economies are changing (e.g., the recent acquisition of McDonnell Douglas by Boeing), but elements of it can be found virtually everywhere, depending on the type of industry involved.

In this example, we will look at the athletic footwear industry.  In particular, we can focus on the athletic footwear market as an example of the formation of new, highly volatile, competitive markets.  Changes in the footwear industry can be summarized as:

• footwear production has grown rapidly //Overhead Fig 2
• intense competition and market volatility are indicated by the explosion in the number of "styles" of athletic shoes, and competition among brands //Overhead Fig 1
• a key to success in the industry is innovation and the rapid turn-around of design and production
• however, the production of shoes remains inherently a "Fordist," labor-intensive process
• producers must have output and design flexibility
• producers must preserve proprietary information and technology, yet be organizationally flexible

NIKE'S  STRUCTURE  AND  STRATEGY

• "Nike" began in 1964 as "Blue Ribbon Sports," a seller of Japanese-manufactured footwear
• In 1970, as the athletic footwear market grew, the Nike brand name was born
• In order to gain greater control over production and assembly, Nike opened a plant in New Hampshire in 1973 (which it closed in 1986). The bulk of its production, however, has always been overseas through subcontracting relationships of varying loyalty and intensity. //Overhead Fig 3

• Developed partners:  These production partnerships were first in Japan, but are now in Taiwan and South Korea).  These partners produce the "upper echelon" of shoes, or expensive "statement" shoes, typically in smaller batches (10-25K pairs a day).  They are more likely to collaborate in innovations with Nike, many are vertically disintegrated themselves, subcontracting "nonproprietary" shoe components and materials to other local producers.  Those partners which produce solely for Nike receive monthly orders from Nike which don't vary more than 20% to preserve production stability.
• Volume partners:  These are large factories producing large batches of standardized, lower-priced footwear (70-85K pairs a day).  Production is routinized and serves multiple (often more than 10) companies, other than Nike (e.g., Reebok).  These are "capacity" contractors--they absorb the market risk associated with cyclical demand.  These factories are typically more vertically integrated, owning their own leather tanneries and rubber factories.  They are not where the most innovative or "state of the art" shoes are produced, as these factories produce for multiple companies; for this reason, relationships between Nike and these companies are less loyal.
• Developing partners:  These factories are located mostly in Thailand, Indonesia, and China.  These locations offer Nike very low labor costs and a "hedge" against rising labor costs in other factories or exchange rate risk.  These factories are more loyal to Nike; often they are the product of a joint venture between Nike and its developed partners in Taiwan or South Korea.  Often, the joint investment into these factories raises their ability to manufacture increasingly sophisticated products more rapidly than if they were producing unaided.

• Shoe production is inherently labor intensive (although technology can vary).  Thus, labor is an important input for footwear producers to consider, but the labor process remains largely routine in the assembly of shoe components.
• Subcontracting relationships provide organizational flexibility, moving market risk to partners, even though production processes remain largely routine.
• Southeast Asia offers several locational advantages to Nike: i) it is a rapidly growing market; ii) low-wage, "semi-skilled" labor is plentiful; iii) governments encourage investment and transnational production by relaxing the enforcement of labor standards.

The business environment (that is, with respect to markets, regulation, competition, innovation) sets the context in which corporations must strategize to preserve their market share and market power.  This strategy involves a careful choice of how best to flexibly structure the firm's organization and production, in which geography plays an important role.  We have looked closely at this relationship--between corporate structure and strategy--by looking at Nike.  By doing so, we have highlighted the fundamental relationship between geography, corporate structure and strategy, and transnational production.

Concepts:
corporate restructuring
multinational corporations
transnational production
corporate strategy
corporate structure
flexibility (flexible production; flexible organization)
Fordism, post-Fordism
subcontracting
vertical disintegration
globalization
New International Division of Labor
market volatility
 

• Donaghu, Michael T. and Barff, Richard.  1990.  "Nike just did it: International subcontracting and flexibility in athletic footwear production."  Regional Studies 24(6):  537-52.
• Barff, Richard and Austen, J.  1993.  "'It's gotta be da shoes': domestic manufacturing, international subcontracting, and the production of athletic footwear."  Environment and Planning A 25:  1103-14.