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Nike versus New Balance: Trade Policy in a World of Global Value Chains

By: Simon Brodeur, Ari Van Assche

In 2013, Michael Froman, the newly appointed United States Trade Representative, was responsible for leading the U.S. negotiating team in the formulation of the terms of the Trans-Pacific Partnership…

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  • Publication Date: Sep 19, 2014
  • Discipline: Economics
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In 2013, Michael Froman, the newly appointed United States Trade Representative, was responsible for leading the U.S. negotiating team in the formulation of the terms of the Trans-Pacific Partnership (TPP). During the negotiations, Froman had to adopt a position on the sensitive issue of tariffs on imported footwear. On the one hand, Vietnam, a TPP member country, was America's second largest foreign footwear supplier and was pushing for the elimination of tariffs. On the other hand, U.S. labour unions argued that Vietnam's strength in the footwear industry was based on unfair subsidies and labour practices. Even among U.S. footwear companies, there was disagreement. New Balance, the only U.S. athletic footwear company that produced parts of its shoes in the U.S., was openly opposed to the elimination of tariffs, as their removal could lead to factory closures in the U.S. Nike Inc., however, manufactured all its shoes overseas and was an overt proponent of the abolition of tariffs. Froman had to carefully weigh the arguments of all the stakeholders to determine whether or not to accept the lowering of tariffs on footwear imported from Vietnam and, if he accepted, whether or not to impose conditions on Vietnam.

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The case provides a vehicle for analyzing strategic, contextual, and ethical challenges underlying modern trade negotiations.

Sep 19, 2014

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nike vs new balance case study answers

Volume 12 Issue 4 December 2014

Nike versus New Balance: Trade Policy in a World of Global Value Chains

Case prepared by Simon BRODEUR1 and Professor Ari VAN ASSCHE2

United States Trade Representative (USTR) Michael Froman closed the door of his new office, walked to his window, and admired the glimmering Washington D.C. skyline. During his illustrious career as a government official, Froman had never wielded such power as he did now: he had just been nominated by President Obama to be the 11th USTR, serving as the president’s principal advisor, negotiator, and spokesperson on matters pertaining to international trade and investment. One of his main responsibilities would be to complete negotiations on the Trans- Pacific Partnership (TPP), an Asian-Pacific trading bloc built upon the pre-existing Trans-Pacific Strategic Economic Partnership Agreement between Brunei, Chile, New Zealand, and Singapore. As of 2013, numerous nations had participated in the TPP negotiations, namely the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam (Exhibit 1).

The TPP was the most promising trade liberalization initiative since the Doha round of world trade talks, which stalled in 2008, and would cover approximately 40% of the world’s GDP.3 The multilateral talks could potentially deliver huge benefits for the U.S. economy, as the TPP would provide American companies with unprecedented market access to key players in the Asia- Pacific, the largest and fastest growing region in the world.4 Furthermore, it would allow consumers and importers to enjoy wider and cheaper access to the goods and services of TPP countries.

Froman knew that the TPP negotiations would have to be conducted with caution, however; reducing U.S. barriers to trade and investment would put additional pressure on the country’s already frail manufacturing sector. Between 1999 and 2012, while the total number of U.S. jobs had increased by 2.3%, U.S. production occupations had fallen by 31.9% (Exhibit 2). Import competition from and offshoring to Asian manufacturing nations such as China and Indonesia − and TPP negotiating partner Vietnam − were widely blamed for the decline of U.S. manufacturing.

1 Simon Brodeur is an M.Sc. student at HEC Montréal. 2 Ari Van Assche is an Associate Professor in the Department of International Business at HEC Montréal. 3 “Free Trade Agreements: Opening Up the Pacific,” The Economist, November 12, 2011 (accessed October 17, 2013). 4 International Bank for Reconstruction and Development / World Bank, East Asia and Pacific Economic Update – April 2013 – A Fine Balance, 2013 (accessed October 17, 2013). © HEC Montréal 2014 All rights reserved for all countries. Any translation or alteration in any form whatsoever is prohibited. The International Journal of Case Studies in Management is published on-line (http://www.hec.ca/en/case_centre/ijcsm/), ISSN 1911-2599. This case is intended to be used as the framework for an educational discussion and does not imply any judgement on the administrative situation presented. Deposited under number 9 00 2014 001 with the HEC Montréal Case Centre, 3000, chemin de la Côte-Sainte-Catherine, Montréal (Québec) Canada H3T 2A7. Nike versus New Balance: Trade Policy in a World of Global Value Chains

When negotiating the TPP, it was therefore imperative for Froman to find the right balance between promoting American business interests abroad and protecting American interests at home.

In recent months, industry activists and politicians had focused on the downside risks of the TPP negotiations for the American footwear industry. U.S. footwear manufacturing had contracted by almost a third in the last decade due to increased import competition from China and Vietnam, and tariff reductions on Vietnamese imports would likely accelerate this decline.

Froman was aware that the footwear industry would be a major sticking point in the TPP negotiations. After consulting with various U.S. footwear lobby groups earlier that day, he knew that even among American companies, there was disagreement on the position the U.S. should adopt. The divide was especially wide between two major footwear companies: Nike Inc. and New Balance. On the one hand, New Balance was strongly opposed to the removal of tariffs on shoes from Vietnam, as they believed this would endanger footwear manufacturing activities in the U.S. On the other hand, Nike Inc. was adamant that the tariffs on footwear imports from Vietnam were detrimental to the U.S. economy. According to Nike, tariffs have led to higher footwear prices, which harm U.S. consumers and reduce the competitiveness of U.S. firms. If tariffs were eliminated, U.S. footwear manufacturers would be able to save on production costs and reinvest those savings in modern, high-value-added jobs in America.1

When he was sworn in as USTR, Froman had promised to use every tool at his disposal to level the playing field so that Americans could compete and win in the global economy.2 Yet discussions with representatives from New Balance and Nike had shown him that identifying the best negotiating strategy would be complex and require in-depth analysis of the impact of tariff elimination on the various footwear industry stakeholders. His stance on the TPP footwear dilemma required urgent deliberation, as the president had summoned all of his advisors to a conference call later that evening and expected them to advise him on the position the United States should adopt during the TPP negotiations.

The U.S. footwear industry

Froman had to first consider the U.S. footwear market and industry to determine the impact of the TPP on the domestic economy. The challenges facing the footwear manufacturing industry were similar to those of the U.S. manufacturing sector as a whole. Rising wages and heavy competition from low-cost countries were putting a strain on U.S. shoe factories. In 2012, only 13,290 people were employed in the footwear manufacturing industry, down from 19,440 in 2003. This decrease was due largely to a 41% decline in the number of production workers (Exhibit 3). In comparison, office and administrative support occupations in the footwear industry had dropped by just 25%, and management occupations had almost returned to 2003 levels.

1 Eric Martin, “New Balance Wants Its Tariffs. Nike Doesn’t,” BloombergBusinessWeek, May 3, 2012 (accessed October 17, 2013). 2 Office of the United States Trade Representative, “Statement by United States Trade Representative Michael Froman,” 2013: http://www.ustr.gov/about-us/press-office/press-releases/2013/june/amb-froman-statement (accessed October 17, 2013).

© HEC Montréal 2 Nike versus New Balance: Trade Policy in a World of Global Value Chains

The decrease in U.S. footwear manufacturing activities contrasts sharply with the steady growth of the U.S. footwear market. It is the world’s largest, valued at $71.7 billion in 2012, accounting for 27.9% of the global footwear market, and projected to continue developing in the short to medium term (Exhibit 4).

The main reason for America’s manufacturing decline is growing import competition from low- wage countries. Currently, almost 99% of the footwear sold in the United States is imported from low-cost manufacturing locations, especially in East and Southeast Asia.1 China alone accounted for 71.9% of U.S. footwear imports in 2012, while TPP negotiating partner Vietnam, a rapidly developing footwear behemoth, accounted for 10.1% of those imports (Exhibit 5). The pace of Vietnam’s growth in the footwear market is staggering: exports to the U.S. jumped an astounding 23.8% annually between 1997 and 2012, and that trend is expected to continue over the short term as wages in China continue to rise.

Vietnamese footwear industry

Ever since Vietnam signed the U.S.-Vietnam Bilateral Trade Agreement in 2001 establishing “normal trade relations,”2 it has been an increasingly important source of footwear products. In just fifteen years, Vietnam grew into America’s second largest supplier of footwear imports (Exhibit 5). In 2012, about 13% of its exports to the U.S. were footwear products, making this a strategic industry for Vietnam.3

Vietnam has a clear footwear production cost advantage over the U.S. A New Balance spokesperson estimated that producing a pair of shoes in the U.S. costs 25-35% more than in Vietnam,4 while a Nike representative estimated that it costs around US$20-25 to produce a pair of Nike running shoes in a Vietnamese factory.5

Low wages are a key driver of this production cost advantage. Earnings in Vietnam are more than 20 times lower than in the U.S. A study by the Congressional Research Service concluded that wages in Vietnam’s footwear and apparel manufacturing sector averaged US$0.51 an hour in 2012.6 This is significantly lower than in China.7

In addition to low wages, low labour and environmental standards help Vietnamese companies keep their production costs down. Vietnam has ratified eighteen conventions with the

1 Timothy Aeppel, “New Balance Sweats Push to End U.S. Shoe Tariffs,” The Wall Street Journal, February 27, 2013, (accessed October 17, 2013). 2 Embassy of the United States, Hanoi, Vietnam, “The U.S.-Vietnam Bilateral Trade Agreement (BTA) – Resources for Understanding,” n.d. (accessed October 17, 2013). 3 United States Census Bureau, “U.S. Imports from Vietnam by 5-digit End-Use Code, 2003 – 2012,” 2012 (accessed October 17, 2013). 4 See Aeppel, op. cit. 5 Jim Landers, “Vietnam Trade Deal Sparks a Running Battle on Shoe Tariffs,” The Dallas Morning News, December 27, 2012 (accessed October 17, 2013). 6 Michaela D. Platzer, U.S. Textile Manufacturing and the Trans-Pacific Partnership Negotiations, Congressional Research Service, October 5, 2012 (accessed October 17, 2013). 7 See Aeppel, op. cit.

© HEC Montréal 3 Nike versus New Balance: Trade Policy in a World of Global Value Chains

International Labour Organization (ILO).1 However, labour unions in Vietnam are not independent from the ruling communist party, and workers are not free to create or join unions. Furthermore, official strikes are rendered almost impossible due to government requirements. While collective bargaining exists, it is a relatively new concept and has yet to take root in the country. Finally, child labour, forced labour, and long hours are still a problem in Vietnam as the government struggles to enforce laws prohibiting such working conditions.2

Government support of the country’s strategic footwear sector also strengthens Vietnamese firms. Vietnam is officially still a communist country, and its footwear sector is dominated by large state-owned enterprises that enjoy large government subsidies and extensive support. For example, Vinatex, the state-owned textile and apparel consortium, is the tenth largest garment producer in the world and currently accounts for 40% of the country’s apparel production, 60% of its textile production, and close to 20% of its total apparel and textile exports.3 According to the National Council of Textile Organizations, Vinatex benefits from eleven different government subsidy programs that include low-cost loans and free land.4

A final advantage of Vietnam’s footwear industry is its heavy reliance on cheap imported yarn from China. Like Vietnamese footwear, Chinese yarn is predominantly produced by large state- owned enterprises that receive dozens of direct and indirect subsidies from the government. The allegedly unfair practices of Chinese yarn producers has led many countries, including those in the European Union, to impose antidumping tariffs on yarn originating from China.5

U.S. trade protectionism

Compared to other industries, the U.S. footwear sector is highly protected by import tariffs. While U.S. import tariffs on consumer goods average about 1.5%, the average tariff on imported footwear is approximately 10%.6 Moreover, they can run as high as 48% of the “free on board” (FOB) value of imported shoes, that is, the commercial value of the shoes before transportation costs are added to the price (Exhibit 6). These tariff rates substantially affect production costs; for instance, of their US$20-25 overall production costs, current tariffs on athletic shoes add US$3 to US$5 to the cost of midrange running shoes from Vietnam, increasing production costs by as much as 25%.7

While the United States has signed numerous free trade agreements (FTA) over the years, it has generally been reluctant to completely eliminate tariffs on footwear and has systematically

1 International Labour Organization, “International Labour Standards,” n.d. (accessed October 17, 2013). 2 Embassy of the United States, Hanoi, Vietnam, “International Labor Standards – Critical To Successful Economic Development – Workers’ Rights and Labor Standards,” n.d. (accessed October 17, 2013). 3 See Platzer, op. cit. 4 National Council of Textile Organizations, “Fact Sheet – Trans-Pacific Partnership Negotiations,” 2012 (accessed October 17, 2013). 5 Jonathan Steams, “China Faces Five-Year EU Tariffs on Automotive Yarn,” Bloomberg, November 29, 2010 (accessed October 17, 2013). 6 Erik Siemers, “Blumenauer: Footwear Tariffs Hurt Nike, Drive Up Costs,” Portland Business Journal, April 20, 2012 (accessed October 17, 2013). 7 See Aeppel, op. cit.

© HEC Montréal 4 Nike versus New Balance: Trade Policy in a World of Global Value Chains imposed a “yarn forward rule” to these FTAs. This rule of origin requires that the yarn used in shoe manufacturing be produced within the FTA countries to qualify for the reduced duties agreed upon in the trade agreements.1 This serves to protect the U.S. textile industry, a battered yet significant component of the manufacturing sector. Textiles are a US$53 billion industry that employed almost 240,000 workers in 2011. However, its prominence has declined steadily in recent years, with almost 300,000 fewer people working in the textile industry than in 2001.2

New Balance versus Nike Inc.

While Vietnam was pressuring the U.S. to reduce tariffs on imported footwear, interest groups inside the country were also pressuring Froman and the U.S. negotiators. Froman’s meetings with various lobby groups revealed that the widest divide was between American footwear companies New Balance and Nike Inc. On the one hand, New Balance argued that reductions in import tariffs would be detrimental to U.S. footwear workers and smaller footwear manufacturing companies. On the other hand, Nike Inc. contended that reducing tariffs on footwear would strengthen U.S. companies, create high-value footwear jobs in the United States, and lower consumer prices. Froman was particularly intrigued by this disagreement: which of the two companies was really defending American economic interests?

New Balance Athletic Shoe, Inc.

New Balance, an American firm headquartered in Boston , Massachusetts , has been a player in the footwear industry for many years.3 It was founded in 1906 under the name New Balance Arch Support Company by William J. Riley, a British immigrant who had the idea of designing arch supports shaped like a chicken’s three-clawed foot to maximize comfort, mostly for policemen and waiters. He later added ancillary products, and, in 1938, designed his first athletic shoe made of lightweight kangaroo leather with crepe soles for the Brown Bag Harriers Running Club in Belmont, MA. The company continued to grow and was bought in 1972 by Jim Davis, an entrepreneur and marathoner who still owns the firm. By 2012, his business acumen had led New Balance to becoming the fourth largest athletic footwear and apparel company in the world with annual sales of $2.4 billion in over 120 countries. In addition to its eponymous footwear and clothing brand, the New Balance family also includes the brands Avaron, Cobb Hill, Dunham, PF-Flyers, Brine, and Warrior.

Throughout its history, New Balance has focused on footwear innovation, resulting in a number of industry firsts: the first athletic shoe available in multiple widths; the first running shoe made exclusively for women; and the first shoe to incorporate flared heels for stability. More recently, the company has focused on custom shoes and its “Made in America” businesses. For US$115, a consumer can order a custom pair of shoes that is made in the United States, choosing any combination of twenty-six leather colours and five fabric colours for nine different shoe parts. And the company is taking customization much further than just the shoe’s appearance: it is

1 See Platzer, op. cit. 2 Ibid. 3 Information concerning the company’s history and statistics was obtained from New Balance’s Web sites and Responsible Leadership Report: http://www.newbalance.com/Overview/about_overview,default,pg.html (accessed October 17, 2013).

© HEC Montréal 5 Nike versus New Balance: Trade Policy in a World of Global Value Chains introducing a track-specific running shoe that uses 3-D printing to create a plate on the sole of the shoe that is supposed to enhance performance with every step. These custom shoes can be delivered in as little as four days and are a growing part of the firm’s sales.

Over the years, this focus on innovation has consolidated New Balance’s reputation: in 1976, the New Balance 320 was voted the best running shoe by Runner’s World, and the 990 “Made in the USA” series, produced in the company’s five U.S. factories, has been increasingly popular among U.S. consumers ever since it was launched in 1982. In 2008, New Balance inaugurated a state-of-the-art research lab next to its Lawrence, MA, factory that is exclusively dedicated to research into athletic footwear.

Unlike most of its competitors, New Balance does not outsource all of its footwear production to foreign contractors. Rather, it uses a hybrid system of insourcing and outsourcing. In New England , for example, New Balance owns five manufacturing plants that primarily produce for local markets: 90% of their output is for American consumers, accounting for about a quarter of the company’s total U.S. sales.1 While New Balance is currently the sole U.S. athletic footwear manufacturer to produce a portion of its shoes in the United States, it also relies heavily on foreign contractors in China, Indonesia, and Vietnam.2

New Balance has a number of U.S. suppliers for parts it does not manufacture itself, such as embroidery thread or the leather used in certain shoes (see Exhibit 7 for the various shoe parts). These suppliers, for which New Balance is a major client, employ an estimated 7,000 people in the U.S.3 Moreover, its factories in small U.S. cities are vital to local economies: for instance, in Skowhegan, Maine, a town of 8,500, it is the largest employer in the region and its presence supports a wide range of small businesses, such as restaurants. The fate of whole towns and communities is tied to the manufacturing presence of New Balance in their region.4

During the consultation meetings with Froman, New Balance reps expressed fierce opposition to tariff reductions on Vietnamese imports. According to their spokesperson, Matt LeBretton, it is already 25% to 35% more expensive to produce in the United States than in Vietnam. A tariff reduction is not necessary to make manufacturing activities viable in Vietnam and would only chip away at the tariff buffer that allows New Balance to produce in America.5 This, in turn, would force New Balance to close its U.S. factories and move all of its production facilities overseas. Thousands of jobs would be lost, in addition to hurting the company’s U.S. contractors and the small communities in which the company has manufacturing operations.

1 See Aeppel, op. cit. 2 See Martin, op. cit. 3 New Balance Athletic Shoe, Inc., “Made in the USA,” n.d. (accessed October 17, 2013). 4 See Martin, op. cit. 5 See Aeppel, op. cit.

© HEC Montréal 6 Nike versus New Balance: Trade Policy in a World of Global Value Chains

Nike Inc. is a public company headquartered in Beaverton, Oregon, and the largest athletic footwear and athletic apparel company in the world in terms of sales,1 with over $24 billion in revenues for a total gross profit of over US$10 billion in 2012.2 Its high profit margins (43.4% in 2012) have been reflected in the price of its shares, whose value increased an average of 17% annually between 2003 and 2013.3 Nike Inc. offers a wide variety of products in seven key categories: running, basketball , soccer, men’s training, women’s training, action sports, and Nike Sportswear .4 In addition to the Nike brand, it also owns a few other highly popular apparel and sporting equipment brands such as Hurley, Converse , and Bauer Nike Hockey. Nike Inc. directly employs 37,715 people worldwide, but indirectly employs a much larger workforce in factories owned by contractors who may manufacture products for numerous companies including Nike Inc.5

Nike Inc. was founded in 1964 as Blue Ribbon Sports by two partners, Phil Knight and Bill Bowerman. They started as distributors of Japanese-made Tiger (now Asics) running shoes, but as the relationship between the firm and its Japanese supplier began to sour in the early 1970s, Knight and Bowerman decided it was time to start manufacturing their own shoes. The new line of Nike shoes debuted in 1972 for the U.S. Track & Field Trials, where Bowerman’s innovative design – a very light outsole with waffle-type nubs for traction – was a great success. Then, in 1979, Nike Inc. innovated once more by introducing its Nike Air technology in running shoes, paving the way for its IPO a year later. The firm quickly grew to become the industry leader; however, unlike New Balance, Nike Inc. didn’t position itself in the booming fitness sector and thus lost ground to its competitors.

These difficulties were overcome by major marketing campaigns in the mid-eighties − first in 1985, when Michael Jordan, a young NBA rookie at the time, endorsed the company, and then in 1987, when the iconic Air Max commercial featuring the Beatles song Revolution was aired. By the end of the eighties, Nike Inc. had regained its title of largest footwear company in the world. Marketing then became a large part of Nike Inc.’s business strategy: in 1995, the firm sponsored the Brazil National Soccer Team and supplied its uniforms. One year later, a young golfer named Tiger Woods was signed for a reported annual compensation of $5 million. The company continued to expand, innovate, and skilfully market its products throughout the next decade. In 2012, it became the official sponsor of the National Football League (NFL).6

None of Nike Inc.’s 37,715 employees, roughly half of whom work in the United States,7 are factory workers. Rather, they are mostly involved in providing headquarter services, designing and engineering new equipment, promoting products, and selling them in Nike stores. As with

1 Barbara Brenner, Bodo B. Schlegelmilch, and Björn Ambos, “Inside the NIKE matrix,” in The New Role of Regional Management, Björn Ambos and Bodo B. Schlegelmilch (Ed.), Hampshire, Palgrave Macmillan, 2010. 2 Yahoo! Finance, “Nike, Inc. (NKE),” 2013 (accessed October 17, 2013). 3 Google Finance, “Nike Inc (NYSE:NKE),” 2013 (accessed October 17, 2013). 4 NYSE Euronext, “Nike Inc.,” 2013 (accessed October 17, 2013). 5 Nike Inc., Corporate Responsibility Report, 2012 (accessed October 17, 2013). 6 Nike Inc., “History & Heritage,” n.d. (accessed October 17, 2013). 7 Nike Inc., Corporate Responsibility Report, 2009 (accessed October 17, 2013).

© HEC Montréal 7 Nike versus New Balance: Trade Policy in a World of Global Value Chains most U.S. footwear companies (with the notable exception of New Balance), shoe manufacturing has been almost completely outsourced to foreign contractors in Mexico, Brazil, Argentina, Italy, Bosnia, India, China, South Korea, Japan, Indonesia, Taiwan, and Vietnam.1 In August 2013, it was estimated that Nike’s external contractors employed more than a million people in 774 factories in 42 countries. Vietnam supplies the most workers to Nike, with over 310,000 people producing footwear, apparel, and sporting equipment, followed by China and Indonesia, where contractors employ about 260,000 and 175,000 people respectively. Three quarters of Nike’s global workforce is located in these three countries (see Exhibit 8).

Contrary to New Balance, Nike Inc. was a strong supporter of reducing import tariffs, predicting that U.S. footwear manufacturers would be able to save on production costs and reinvest their savings in modern, high-value-added jobs in the United States. As Erin Dobson, a Nike Inc. spokesperson said, “The question comes down to, is one kind of job more important than another? What are the jobs for the 21st century? They’re not necessarily jobs that existed 30 years ago.”2

Nike Inc. also argued that being able to offshore footwear production without being penalized by tariffs would help to offset rising foreign labour and material costs, which would in turn make footwear more affordable to U.S. consumers. As argued by Oregon’s Representative Earl Blumenauer, whose constituency is home to Nike employees as well as the U.S. headquarters of Adidas , keeping the tariffs taxes millions of Americans on their footwear purchases to keep a few thousand manufacturing jobs.3 This argument is especially compelling when one considers that 99% of the footwear purchased in the U.S. is produced in other countries.

Eliminating Footwear Tariffs – A Blessing or a Curse?

Through his numerous meetings with lobbyists, industry spokespeople, and activists, Froman was able to map the major arguments for and against the elimination of footwear import tariffs under the TPP. While his determination to level the playing field so that Americans could compete in the global economy never faltered, it became obvious to him that no decision would have a purely positive impact on every stakeholder. Numerous realities and potential impacts had to be considered since adopting the wrong position could have ripple effects throughout the U.S. economy.

As the daylight faded, Froman was still pondering the various statistics and viewpoints. Should he side with New Balance and insist that footwear tariff reductions be kept off the negotiating table? Or would the elimination of tariffs as advocated by Nike Inc. be more beneficial to U.S. interests? Should the United States impose conditions on Vietnam for reducing footwear tariffs? His phone rang, and the numbers were still dancing in his head as he heard the beep indicating that he had joined the conference call.

1 Nike Inc., “Global Manufacturing,” 2013 (accessed October 17, 2013). 2 See Martin, op. cit. 3 Ibid.

© HEC Montréal 8 Nike versus New Balance: Trade Policy in a World of Global Value Chains

Exhibit 1 The 12 Negotiating Parties to the Transpacific Partnership

Source: Office of the United States Trade Representative, “The United States in the Trans-Pacific Partnership,” 2011 (accessed October 17, 2013)

© HEC Montréal 9 Nike versus New Balance: Trade Policy in a World of Global Value Chains

Exhibit 2 Production Occupations and Total Employment in the U.S., 1999-2012

Source: Bureau of Labor Statistics, “Occupational Employment Statistics,” 2013 (accessed October 17, 2013)

© HEC Montréal 10 Nike versus New Balance: Trade Policy in a World of Global Value Chains

Exhibit 3 U.S. Occupations in the Footwear Industry, 2003-2012

Office and Production Management Total administrative occupations occupations support occupations Average Average Average Average # # # # Year hourly hourly hourly hourly workers workers workers workers wage wage wage wage 2003 19,440 12.26 14,040 10.48 1,900 12.25 620 43.72 2004 19,170 13.14 12,120 10.35 2,410 12.79 810 42.77 2005 18,410 13.24 12,170 10.81 2,350 13.00 620 43.38 2006 17,340 13.77 12,300 11.31 1,930 13.51 600 44.66 2007 15,760 13.87 12,150 11.75 1,170 13.42 470 44.14 2008 16,290 14.40 12,650 12.21 1,100 14.47 490 46.56 2009 15,420 14.43 12,030 12.32 980 15.06 440 48.14 2010 13,790 15.89 9,770 12.56 1,170 15.73 470 54.62 2011 13,650 16.25 9,600 12.76 1,260 15.81 470 56.50 2012 13,290 17.61 8,340 12.70 1,420 15.87 590 56.23

© HEC Montréal 11 Nike versus New Balance: Trade Policy in a World of Global Value Chains

Exhibit 4 U.S. Footwear Market Value and Growth, 2008

Source: Marketline, U.S. Footwear in the United States, March 2013

© HEC Montréal 12 Nike versus New Balance: Trade Policy in a World of Global Value Chains

Exhibit 5 Growth of U.S. Footwear Imports, by Country of Origin, 1997-2012

Share of U.S. footwear imports U.S. Footwear imports (US$ Millions) Compound Annual (%) Growth (%) Country 1997 2012 1997-2012 1997 2012 China 7,737 17,876 5.74 53.03 71.90 Vietnam 102 2,512 23.83 0.70 10.11 Italy 1,244 1,230 -0.07 8.53 4.95 Indonesia 1,139 982 -0.99 7.81 3.95 Mexico 393 497 1.57 2.69 2.00 Rest of the world 3,560 1,233 3.62 27.24 7.09

Source: United Nations Comtrade Database: http://comtrade.un.org/

© HEC Montréal 13 Nike versus New Balance: Trade Policy in a World of Global Value Chains

Exhibit 6 Import Duty on a Pair of Athletic Shoes That Do Not Cover the Ankles with Outer Soles of Rubber, Plastics, Leather or Composition Leather, and Have a F.O.B. Value of More Than $6.50

Tariff Rate Harmonized Most Textile KORUS System Favoured NAFTA Upper FTA Code Nation F.O.B. value 20% + 90 6404.11.89 0% 0% $12 Leather 6403.99.90 10% 0% 0% upper

Source: United States International Trade Commission, “Harmonized Tariff Schedule of the United States,” 2013 (accessed October 17, 2013)

© HEC Montréal 14 Nike versus New Balance: Trade Policy in a World of Global Value Chains

Exhibit 7 A New Balance Shoe Made in the United States

Source: Timothy Aeppel, “New Balance Sweats Push to End U.S. Shoe Tariffs,” Wall Street Journal, February 27, 2013 (accessed October 17, 2013)

© HEC Montréal 15 Nike versus New Balance: Trade Policy in a World of Global Value Chains

Exhibit 8 Nike Inc.’s Manufacturing Network (data as of August 2013)

Global production Footwear production Number Number Workers Country Workers of Workers of (Nike factories factories brand) Vietnam 312,828 70 231,420 29 193,169

China 263,108 213 129,920 38 119,654

Indonesia 174,259 42 131,958 20 117,452

United States 13,670 65 77 2 0

Total (including 1,005,547 774 528,509 163 459,307 other countries

Source: Nike Inc., “Global Manufacturing,” 2013 (accessed October 17, 2013)  These statistics do not indicate the number of workers that are employed by Nike Inc., but rather the number of workers that are involved in the production of Nike Inc. products.

© HEC Montréal 16

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Reading: HBR Case Study - Nike vs. New Balance ...

Reading: HBR Case Study - Nike vs. New Balance  https://hbsp.harvard.edu/product/HEC087-PDF-ENG?Ntt=trade  

In 2013, Michael Froman, the newly appointed United States Trade Representative, was responsible for leading the U.S. negotiating team in the formulation of the terms of the Trans-Pacific Partnership (TPP). During the negotiations, Froman had to adopt a position on the sensitive issue of tariffs on imported footwear. On the one hand, Vietnam, a TPP member country, was America's second largest foreign footwear supplier and was pushing for the elimination of tariffs. On the other hand, U.S. labour unions argued that Vietnam's strength in the footwear industry was based on unfair subsidies and labour practices. Even among U.S. footwear companies, there was disagreement. New Balance, the only U.S. athletic footwear company that produced parts of its shoes in the U.S., was openly opposed to the elimination of tariffs, as their removal could lead to factory closures in the U.S. Nike Inc., however, manufactured all its shoes overseas and was an overt proponent of the abolition of tariffs. Froman had to carefully weigh the arguments of all the stakeholders to determine whether or not to accept the lowering of tariffs on footwear imported from Vietnam and, if he accepted, whether or not to impose conditions on Vietnam.

Questions :

  • What are the major takeaways for you from this reading? Choose at least three.
  • What elements relate for you to the social justice principles we have discussed in class? What about privilege and/or power?
  • With regard to the elimination of import tariffs on Vietnamese footwear, is what is good for Nike Inc. also in America's economic interest? What about New Balance?
  • Major drivers of the success of Vietnam's footwear manufacturing sector are purported to be its weakly enforced labour and environmental standards and its generous subsidies to state-owned enterprises. Does this give Vietnamese firms an unfair competitive advantage over U.S. firms?
  • What should U.S. Trade Representative Michael Froman do about import tariffs on Vietnamese footwear to level the playing field to allow Americans to compete and win in the global economy?

Answer & Explanation

1.In the Trans-Pacific Partnership (TPP), the U.S. Trade Representative was tasked with making a decision on the tariffs on imported footwear. Vietnam, a TPP member, was pushing for the elimination of tariffs, while unions argued that Vietnam's strength in the footwear industry was based on unfair subsidies and labour practice.

2.The case study of Nike vs. New Balance brings social justice principles to the forefront, as well as power dynamics and privilege. At the heart of the case study is the issue of tariffs on footwear imported from Vietnam. The tariffs can either help or hurt the economies of both countries, depending on the outcome of negotiations. The U.S. Trade Representative, Michael Froman, is in a difficult position when it comes to trade negotiations with Vietnam. The case study highlights the importance of understanding the complexities of the issues and striving for a just and equitable outcome. It also reinforces the need for careful consideration of power dynamics and privilege when making decisions.s.

3..The dispute between Nike Inc. and New Balance over the elimination of tariffs on imported footwear from Vietnam highlights several issues that are at the heart of social justice principles. These include the idea of privilege and power, as well as the importance of fair trade and equality. The US Trade Representative must carefully consider the arguments of both Nike Inc. and New Balance before making a decision. He must weigh the potential economic benefits of eliminating tariffs against the potential harm to workers in the US and Vietnam, and determine whether or not the elimination of tariffs would be fair and equitable.

4.Vietnamese footwear firms have an unfair competitive advantage over U.S. firms, writes Michael Froman. This unfair advantage is driven by weakly enforced labour and environmental standards and generous subsidies to state-owned enterprises, he argues. Vietnam's footwear industry has been key to the success of the US footwear industry.

5.Michael Froman must carefully consider all stakeholders' interests when deciding whether or not to accept the lowering of tariffs on footwear imported from Vietnam. New Balance, the only US athletic footwear company that produces parts of its shoes in the US, is strongly opposed to the elimination of tariffs. Froman must consider the potential economic impacts of factory closures and the implications for US workers and the US economy. Nike Inc has argued that the elimination of tariffs could lead to increased competition and lower prices for consumers. Froman must take into account all of these factors when deciding whether or not to accept the lowering of tariffs on footwear imported from Vietnam.

  •  The reading illustrates the difficulty of making trade policy decisions while considering the interests of multiple stakeholders. In the case of the Trans-Pacific Partnership (TPP), the U.S. Trade Representative was tasked with making a decision on the tariffs on imported footwear. On the one hand, Vietnam, a TPP member, was pushing for the elimination of tariffs, while on the other, U.S. labour unions argued that Vietnam's strength in the footwear industry was based on unfair subsidies and labour practices. The U.S. Trade Representative had to weigh these competing interests, as well as those of U.S. footwear companies, to determine the best course of action. This demonstrates the complex nature of trade policy decisions and the need to consider the interests of all stakeholders before making a decision.
  • The reading also highlights the importance of understanding the implications of trade policy decisions. When making a decision on the tariffs on imported footwear, the U.S. Trade Representative needed to understand the potential impacts of his decision on both domestic and international stakeholders. For example, if tariffs were to be eliminated, it could lead to factory closures in the U.S., as well as an influx of cheaper products from Vietnam. This emphasizes the need to consider the long-term implications of trade policy decisions, both domestically and internationally.
  •  Finally, the case study also illustrates the power of industry lobbying. In the case of the TPP, U.S. footwear companies had strong opinions on the tariffs on imported footwear and were vocal in voicing their opinions. Nike, which manufactured all its shoes overseas, was an overt proponent of the abolition of tariffs, while New Balance, which produced parts of its shoes in the U.S., was openly opposed to the elimination of tariffs. This demonstrates the influence that industry lobbying can have on trade policy decisions.
  • The case study of Nike vs. New Balance brings social justice principles discussed in class to the forefront, as well as power dynamics and privilege. The case study underscores the importance of considering multiple perspectives, understanding the nuances and complexities of the issues, and striving for a just and equitable outcome for all stakeholders.
  • At the heart of the case study is the issue of tariffs on footwear imported from Vietnam. This is an issue of both economic justice and social justice. From an economic justice perspective, the tariffs have a direct impact on the livelihoods of American workers, as well as those employed in Vietnam. The tariffs can either help or hurt the economies of both countries, depending on the outcome of the negotiations. From a social justice perspective, the tariffs also have implications for labor rights and human rights. Vietnam's strength in the footwear industry has been linked to unfair labor practices, such as forced labor, low wages, and inadequate safety standards. If the tariffs are lowered, this could lead to an increase in the exploitation of workers in Vietnam, while also threatening the livelihoods of American workers.
  • The case study also brings to light the issue of power and privilege. On one hand, the U.S. has the power to impose tariffs on imports, which gives them a certain level of leverage in the negotiations. On the other hand, Vietnam is a much smaller and poorer country, which means they have much less power and influence in the negotiations. This power imbalance is further complicated by the fact that Nike Inc., the largest player in the U.S. footwear industry, is an overt proponent of the abolition of tariffs, while New Balance, the only U.S. athletic footwear company that produces parts of its shoes in the U.S., is openly opposed to the elimination of tariffs. This puts Michael Froman, the U.S. Trade Representative, in a difficult position of having to weigh the arguments of all the stakeholders to determine the best outcome for all.
  • Ultimately, the case study highlights the importance of understanding the complexities of the issues and striving for a just and equitable outcome for all stakeholders. It also reinforces the need for a careful consideration of power dynamics and privilege when making decisions. In this case, Michael Froman needs to consider the implications for both U.S. and Vietnam workers, as well as the power dynamics between the countries, in order to reach a decision that is fair and just for all.
  • The dispute between Nike Inc. and New Balance over the elimination of tariffs on imported footwear from Vietnam highlights several issues that are at the heart of social justice principles. One such issue is the idea of privilege and power. Nike Inc. is a much larger company than New Balance, and their power and influence over the US Trade Representative is much greater than that of New Balance. This privilege has enabled them to push for the elimination of tariffs, something that would benefit their business greatly. On the other hand, New Balance, which produces parts of its shoes in the US, is much smaller and has less power and influence. As such, they have been openly opposed to the elimination of tariffs, as they fear that it could lead to factory closures in the US. Another social justice principle that is being addressed in this dispute is the idea of fairness and equality. Nike Inc. has argued that the elimination of tariffs would benefit the economy by increasing trade and reducing prices for consumers. On the other hand, New Balance has argued that the elimination of tariffs would be unfair, as it could lead to unfair competition from companies in Vietnam, who would benefit from lower costs due to the lack of tariffs. This could lead to job losses in the US and an overall negative impact on the economy. In addition to the issues of privilege and fairness, the dispute between Nike Inc. and New Balance also highlights the importance of labor rights and practices. Vietnam, a TPP member country, has been accused of having unfair labor practices, and New Balance has argued that the elimination of tariffs would only serve to further these practices. On the other hand, Nike Inc. has argued that the elimination of tariffs would benefit workers in Vietnam by providing them with better job opportunities. Ultimately, the US Trade Representative must carefully consider the arguments of both Nike Inc. and New Balance before making a decision. He must weigh the potential economic benefits of eliminating tariffs against the potential harm to workers in the US and Vietnam, and determine whether or not the elimination of tariffs would be fair and equitable. He must also consider the issue of privilege and power and ensure that any decision he makes is not swayed by the influence of larger companies such as Nike Inc. In doing so, he can ensure that the decision he makes is a fair and just one.
  • The major drivers of the success of Vietnam's footwear manufacturing sector are indeed concerning, as they point to an unfair competitive advantage that Vietnamese firms have over U.S. firms. This unfair advantage is driven by weakly enforced labour and environmental standards, and by generous subsidies to state-owned enterprises. Such measures create an uneven playing field, as U.S. firms are not able to match the low labour and environmental standards of Vietnam's footwear industry, and lack the same level of government subsidies. This puts U.S. firms at a significant disadvantage when competing with their Vietnamese counterparts in the production of footwear.
  • For example, in Vietnam, the enforcement of labour laws is often lax and workers are rarely paid a living wage. This gives Vietnamese firms the ability to pay workers a much lower wage than U.S. firms and still make a profit. This allows Vietnamese firms to undercut U.S. firms on price, giving them a competitive edge in the footwear market. Similarly, in Vietnam, environmental standards are often not enforced, allowing firms to produce footwear with materials that are not up to the same standards as those used by U.S. firms. This also allows Vietnamese firms to produce footwear at a lower cost than U.S. firms, as they are not required to use more costly materials.
  • In addition to weak labour and environmental standards, Vietnamese firms also benefit from generous subsidies from the government. These subsidies allow Vietnamese firms to reduce their production costs, making their products more affordable and giving them an advantage over U.S. firms. This is especially true in the case of state-owned enterprises, which are often given preferential access to capital, resources, and technology. This gives them a competitive edge over U.S. firms, as they are able to produce footwear at a lower cost.
  • The combination of weak labour and environmental standards and generous government subsidies gives Vietnamese firms an unfair competitive advantage over U.S. firms. This creates an uneven playing field that disadvantages U.S. firms and undermines their ability to compete in the footwear industry. This is why Michael Froman had to carefully consider the arguments of all stakeholders before deciding whether or not to accept the lowering of tariffs on footwear imported from Vietnam.
  • The United States Trade Representative Michael Froman must carefully consider all stakeholders' interests when deciding whether or not to accept the lowering of tariffs on footwear imported from Vietnam. It is clear that the elimination of tariffs could lead to factory closures in the US, as New Balance, the only US athletic footwear company that produces parts of its shoes in the US, is strongly opposed to the elimination of tariffs. At the same time, Vietnam's strength in the footwear industry is based on unfair subsidies and labor practices, which could lead to a decrease in American competitiveness if tariffs are lowered.
  • Froman must consider the long-term economic benefit of the Trans-Pacific Partnership (TPP) and its potential to level the playing field and allow Americans to compete and win in the global economy. To do this, Froman should take into account the interests of all the stakeholders involved, including the US labor unions, Nike Inc, and New Balance.
  • First, Froman must assess the impact of the elimination of tariffs on domestic manufacturers. New Balance has argued that the removal of tariffs could lead to factory closures in the US. The tariffs currently protect US manufacturers from unfair competition, and the removal of these tariffs could create a significant disadvantage for US-based manufacturers. Froman must consider the potential economic impacts of factory closures and the implications for US workers and the US economy.
  • Second, Froman must consider the impact of the elimination of tariffs on American consumers. Nike Inc has argued that the elimination of tariffs could lead to increased competition and lower prices for consumers. Froman must consider the potential benefits for US consumers in terms of increased access to cheaper goods and increased purchasing power.
  • Finally, Froman must assess the impact of the elimination of tariffs on labor practices in Vietnam. US labor unions have argued that the strength of Vietnam's footwear industry is based on unfair subsidies and labor practices. Froman must consider the potential for increased competition and the potential for increased wages and better working conditions for Vietnamese workers.
  • Ultimately, Froman must take into account all of these factors when deciding whether or not to accept the lowering of tariffs on footwear imported from Vietnam, and if he accepts, whether or not to impose conditions on Vietnam. Froman should consider the potential economic impact of the elimination of tariffs on US manufacturers and workers, the potential economic benefit to US consumers, and the potential for improved labor practices in Vietnam. By considering all of these factors, Froman can ensure that the US is able to compete and win in the global economy, while also ensuring that the interests of all stakeholders are taken into account.

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  • Nike versus New Balance: Trade Policy in a World of Global Value Chains
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Introduction to case study solution

EMBA Pro case study solution for Nike versus New Balance: Trade Policy in a World of Global Value Chains case study

At EMBA PRO , we provide corporate level professional case study solution. Nike versus New Balance: Trade Policy in a World of Global Value Chains case study is a Harvard Business School (HBR) case study written by Simon Brodeur, Ari Van Assche. The Nike versus New Balance: Trade Policy in a World of Global Value Chains (referred as “Footwear Tariffs” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Policy. Our immersive learning methodology from – case study discussions to simulations tools help MBA and EMBA professionals to - gain new insight, deepen their knowledge of the Global Business field, and broaden their skill set.

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Case Description of Nike versus New Balance: Trade Policy in a World of Global Value Chains Case Study

In 2013, Michael Froman, the newly appointed United States Trade Representative, was responsible for leading the U.S. negotiating team in the formulation of the terms of the Trans-Pacific Partnership (TPP). During the negotiations, Froman had to adopt a position on the sensitive issue of tariffs on imported footwear. On the one hand, Vietnam, a TPP member country, was America's second largest foreign footwear supplier and was pushing for the elimination of tariffs. On the other hand, U.S. labour unions argued that Vietnam's strength in the footwear industry was based on unfair subsidies and labour practices. Even among U.S. footwear companies, there was disagreement. New Balance, the only U.S. athletic footwear company that produced parts of its shoes in the U.S., was openly opposed to the elimination of tariffs, as their removal could lead to factory closures in the U.S. Nike Inc., however, manufactured all its shoes overseas and was an overt proponent of the abolition of tariffs. Froman had to carefully weigh the arguments of all the stakeholders to determine whether or not to accept the lowering of tariffs on footwear imported from Vietnam and, if he accepted, whether or not to impose conditions on Vietnam.

Case Authors : Simon Brodeur, Ari Van Assche

Topic : global business, related areas : policy, what is the case study method how can you use it to write case solution for nike versus new balance: trade policy in a world of global value chains case study.

Almost all of the case studies contain well defined situations. MBA and EMBA professional can take advantage of these situations to - apply theoretical framework, recommend new processes, and use quantitative methods to suggest course of action. Awareness of the common situations can help MBA & EMBA professionals read the case study more efficiently, discuss it more effectively among the team members, narrow down the options, and write cogently.

Case Study Solution Approaches

Three Step Approach to Nike versus New Balance: Trade Policy in a World of Global Value Chains Case Study Solution

The three step case study solution approach comprises – Conclusions – MBA & EMBA professionals should state their conclusions at the very start. It helps in communicating the points directly and the direction one took. Reasons – At the second stage provide the reasons for the conclusions. Why you choose one course of action over the other. For example why the change effort failed in the case and what can be done to rectify it. Or how the marketing budget can be better spent using social media rather than traditional media. Evidences – Finally you should provide evidences to support your reasons. It has to come from the data provided within the case study rather than data from outside world. Evidences should be both compelling and consistent. In case study method there is ‘no right’ answer, just how effectively you analyzed the situation based on incomplete information and multiple scenarios.

Case Study Solution of Nike versus New Balance: Trade Policy in a World of Global Value Chains

We write Nike versus New Balance: Trade Policy in a World of Global Value Chains case study solution using Harvard Business Review case writing framework & HBR Global Business learning notes. We try to cover all the bases in the field of Global Business, Policy and other related areas.

Objectives of using various frameworks in Nike versus New Balance: Trade Policy in a World of Global Value Chains case study solution

By using the above frameworks for Nike versus New Balance: Trade Policy in a World of Global Value Chains case study solutions, you can clearly draw conclusions on the following areas – What are the strength and weaknesses of Footwear Tariffs (SWOT Analysis) What are external factors that are impacting the business environment (PESTEL Analysis) Should Footwear Tariffs enter new market or launch new product (Opportunities & Threats from SWOT Analysis) What will be the expected profitability of the new products or services (Porter Five Forces Analysis) How it can improve the profitability in a given industry (Porter Value Chain Analysis) What are the resources needed to increase profitability (VRIO Analysis) Finally which business to continue, where to invest further and from which to get out (BCG Growth Share Analysis)

SWOT Analysis of Nike versus New Balance: Trade Policy in a World of Global Value Chains

SWOT analysis stands for – Strengths, Weaknesses, Opportunities and Threats. Strengths and Weaknesses are result of Footwear Tariffs internal factors, while opportunities and threats arise from developments in external environment in which Footwear Tariffs operates. SWOT analysis will help us in not only getting a better insight into Footwear Tariffs present competitive advantage but also help us in how things have to evolve to maintain and consolidate the competitive advantage.

- High customer loyalty & repeat purchase among existing customers – Footwear Tariffs old customers are still loyal to the firm even though it has limited success with millennial. I believe that Footwear Tariffs can make a transition even by keeping these people on board.

- Strong Balance Sheet – The financial statement of Footwear Tariffs looks strong and will help the company going forward.

- Footwear Tariffs business model can be easily replicated by competitors – According to Simon Brodeur, Ari Van Assche , the business model of Footwear Tariffs can be easily replicated by players in the industry.

- Little experience of international market – Even though it is a major player in local market, Footwear Tariffs has little experience in international market. According to Simon Brodeur, Ari Van Assche , Footwear Tariffs needs international talent to penetrate into developing markets.

Opportunities

- Developments in Artificial Intelligence – Footwear Tariffs can use developments in artificial intelligence to better predict consumer demand, cater to niche segments, and make better recommendation engines.

- E-Commerce and Social Media Oriented Business Models – E-commerce business model can help Footwear Tariffs to tie up with local suppliers and logistics provider in international market. Social media growth can help Footwear Tariffs to reduce the cost of entering new market and reaching to customers at a significantly lower marketing budget.

- Age and life-cycle segmentation of Footwear Tariffs shows that the company still hasn’t able to penetrate the millennial market.

- Customers are moving toward mobile first environment which can hamper the growth as Footwear Tariffs still hasn’t got a comprehensive mobile strategy.

Once all the factors mentioned in the Nike versus New Balance: Trade Policy in a World of Global Value Chains case study are organized based on SWOT analysis, just remove the non essential factors. This will help you in building a weighted SWOT analysis which reflects the real importance of factors rather than just tabulation of all the factors mentioned in the case.

What is PESTEL Analysis

PESTEL /PEST / STEP Analysis of Nike versus New Balance: Trade Policy in a World of Global Value Chains Case Study

PESTEL stands for – Political, Economic, Social, Technological, Environmental, and Legal factors that impact the macro environment in which Footwear Tariffs operates in. Simon Brodeur, Ari Van Assche provides extensive information about PESTEL factors in Nike versus New Balance: Trade Policy in a World of Global Value Chains case study.

Political Factors

- Political consensus among various parties regarding taxation rate and investment policies. Over the years the country has progressively worked to lower the entry of barrier and streamline the tax structure.

- Little dangers of armed conflict – Based on the research done by international foreign policy institutions, it is safe to conclude that there is very little probability of country entering into an armed conflict with another state.

Economic Factors

- Inflation rate is one of the key criteria to consider for Footwear Tariffs before entering into a new market.

- Foreign Exchange movement is also an indicator of economic stability. Footwear Tariffs should closely consider the forex inflow and outflow. A number of Footwear Tariffs competitors have lost money in countries such as Brazil, Argentina, and Venezuela due to volatile forex market.

Social Factors

- Leisure activities, social attitudes & power structures in society - are needed to be analyzed by Footwear Tariffs before launching any new products as they will impact the demand of the products.

- Demographic shifts in the economy are also a good social indicator for Footwear Tariffs to predict not only overall trend in market but also demand for Footwear Tariffs product among its core customer segments.

Technological Factors

- Proliferation of mobile phones has created a generation whose primary tool of entertainment and information consumption is mobile phone. Footwear Tariffs needs to adjust its marketing strategy accordingly.

- 5G has potential to transform the business environment especially in terms of marketing and promotion for Footwear Tariffs.

Environmental Factors

- Environmental regulations can impact the cost structure of Footwear Tariffs. It can further impact the cost of doing business in certain markets.

- Consumer activism is significantly impacting Footwear Tariffs branding, marketing and corporate social responsibility (CSR) initiatives.

Legal Factors

- Intellectual property rights are one area where Footwear Tariffs can face legal threats in some of the markets it is operating in.

- Health and safety norms in number of markets that Footwear Tariffs operates in are lax thus impact the competition playing field.

What are Porter Five Forces

Porter Five Forces Analysis of Nike versus New Balance: Trade Policy in a World of Global Value Chains

Competition among existing players, bargaining power of suppliers, bargaining power of buyers, threat of new entrants, and threat of substitutes.

What is VRIO Analysis

VRIO Analysis of Nike versus New Balance: Trade Policy in a World of Global Value Chains

VRIO stands for – Value of the resource that Footwear Tariffs possess, Rareness of those resource, Imitation Risk that competitors pose, and Organizational Competence of Footwear Tariffs. VRIO and VRIN analysis can help the firm.

What is Porter Value Chain

Porter Value Chain Analysis of Nike versus New Balance: Trade Policy in a World of Global Value Chains

As the name suggests Value Chain framework is developed by Michael Porter in 1980’s and it is primarily used for analyzing Footwear Tariffs relative cost and value structure. Managers can use Porter Value Chain framework to disaggregate various processes and their relative costs in the Footwear Tariffs. This will help in answering – the related costs and various sources of competitive advantages of Footwear Tariffs in the markets it operates in. The process can also be done to competitors to understand their competitive advantages and competitive strategies. According to Michael Porter – Competitive Advantage is a relative term and has to be understood in the context of rivalry within an industry. So Value Chain competitive benchmarking should be done based on industry structure and bottlenecks.

What is BCG Growth Share Matrix

BCG Growth Share Matrix of Nike versus New Balance: Trade Policy in a World of Global Value Chains

BCG Growth Share Matrix is very valuable tool to analyze Footwear Tariffs strategic positioning in various sectors that it operates in and strategic options that are available to it. Product Market segmentation in BCG Growth Share matrix should be done with great care as there can be a scenario where Footwear Tariffs can be market leader in the industry without being a dominant player or segment leader in any of the segment. BCG analysis should comprise not only growth share of industry & Footwear Tariffs business unit but also Footwear Tariffs - overall profitability, level of debt, debt paying capacity, growth potential, expansion expertise, dividend requirements from shareholders, and overall competitive strength. Two key considerations while using BCG Growth Share Matrix for Nike versus New Balance: Trade Policy in a World of Global Value Chains case study solution - How to calculate Weighted Average Market Share using BCG Growth Share Matrix Relative Weighted Average Market Share Vs Largest Competitor

5C Marketing Analysis of Nike versus New Balance: Trade Policy in a World of Global Value Chains

4p marketing analysis of nike versus new balance: trade policy in a world of global value chains, porter five forces analysis and solution of nike versus new balance: trade policy in a world of global value chains, porter value chain analysis and solution of nike versus new balance: trade policy in a world of global value chains, case memo & recommendation memo of nike versus new balance: trade policy in a world of global value chains, blue ocean analysis and solution of nike versus new balance: trade policy in a world of global value chains, marketing strategy and analysis nike versus new balance: trade policy in a world of global value chains, vrio /vrin analysis & solution of nike versus new balance: trade policy in a world of global value chains, pestel / step / pest analysis of nike versus new balance: trade policy in a world of global value chains, swot analysis and solution of nike versus new balance: trade policy in a world of global value chains, references & further readings.

Simon Brodeur, Ari Van Assche (2018) , "Nike versus New Balance: Trade Policy in a World of Global Value Chains Harvard Business Review Case Study. Published by HBR Publications.

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nike vs new balance case study answers

Nike vs New Balance- A Detailed Comparison

  • Written by 440 Industries
  • Case Study , New Balance , Nike
  • March 24, 2022

When you’re looking for the ideal running shoe, the question of which brand is the perfect option for you always pops up. A Nike vs New Balance comparison is important to determine which brand’s technologies, feel and fit are right for you. Both brands have a long history of what people love and don’t want. In the elite world, Nike has been dominating for decades. However, New Balance seems to be here to stay. This article explores both brands’ history and factors that differentiate each brand. Without further ado, let’s dive in. Humble Beginnings Nike began with Bill Bowerman and Phil Knight. At first, Bill Bowerman is a track and field coat at the University of Oregon. He reunited with Phil Knight after a brief stint at Standford University. Bowerman wanted athletic footwear and running shoes that were optimized for performance. Due to this, he began to work with varying models after he learned some tips from a local cobbler. In 1964, Knight and Bowerman decided to create Blue Ribbon Sports, an Oregon-based footwear company that operated for many years from the back of a car at varying track meets. They started as a distributor for different imported shoes like Onitsuka Tiger. Knight was always amazed at the quality of their trainers and found them unique in a market dominated by German sneakers. While the world was trying to decide their favorite between Adidas and Puma, Knight turned to Onitsuka Tiger for premium running trainers. After a couple of years of being Onitsuka’s sole distributor in America, there was a rise in competition. This led the duo to think of new ways they could stand out from the crowd. Blue Ribbon Sports became Nike in 1971, and they decided to launch their trainer. Bowerman had always created trainers for the athletes he coached. After researching Onitsuka Tiger shoes and thinking of different ways he could change things for Nike, he started working on a prototype that would become the first-ever Nike sneaker. The First Nike Shoes The Nike vs New Balance comparison won’t be complete without mentioning Nike’s first shoe. Bowerman designed the first Nike Shoe and named it Moon Shine. However, this shoe was made in Bowerman’s waffle iron. The sole waffle design was inspired while Bowerman was eating breakfast one day. He began to wonder if the grooves in his waffle would provide extra traction while playing sport. After some test runs with his waffle iron, the Waffle Trainer came to be. It was a massive success from the beginning because of the grip it offers and its performance-driven design. The prototype model was technically the first Nike shoe. This prototype sold for almost $450,000 at Sotheby’s. Nike Expansion By 1976, Nike was ready to expand. Therefore, the brand hired John Brown and Partners, a Seattle-based ad company, to help with exposure. A year later, the ad agency created the first ad for Nike titled ‘There is No Finish Line.’ Although there were no close-up Nike shoes in the ad, it was a success and propelled the brand further into the limelight. By 1980, Nike owned a 50% market share in the US athletic shoe market. Later that year, Nike went public as a company. After the popularity of its sneakers, Nike decided to expand into the clothing world. It released a line of athletic and sportswear in 1979, and one of the first pieces was the Windrunner. This jacket was lightweight and quickly became a favorite for many people. In 1982, the company partnered with another advertising agency to push its reach into new territories. During one of the campaigns, the slogan ‘just do it’ was created, and it became the brand’s slogan to date. One of the brand’s most significant assets was the many celebrity endorsements. The company signed many athletes like Lebron James, Tiger Woods, and Kobe Bryant quite early in their carrier. However, the brand’s most lucrative endorsement was with Michael Jordan. The bran swooped in with an endorsement from Jordan at the start of his first seasons. Although Jordan was harboring hope for a deal with Adidas, he signed for a payment of $500,000 each year for five years, shoes customized to his request and two Mercedes car. It was an excellent hit for Nike as Jordan rose to stardom. Air Jordans hit the market and made over $100 million in revenue. To date, Air Jordans continue to make money for the brand. Nike vs New Balance – New Balance History The history of New Balance is one of business savvy and tenacity. It begins with a man in Boston who drew inspiration from farm animals and started a company that fast became a cultural fixation. New Balance began as New Balance Arch Support in 1906 and was founded by William J Riley. Riley is an Irish immigrant who resided in Boston. After watching chickens move around his backyard, he drew inspiration for his first product. He was fascinated by how the chickens achieved a perfect balance on their three-pronged feet. Therefore, Riley created flexible arch support with three support points. In 1927, he hired a salesman called Arthur Hall. Borth of them became partners in the company by 1934. At this point, New Balance provided arch support to workers who had to stand for long periods. The company didn’t dabble in sneakers at the time. Over time, Hall sold the company to his daughter Eleanor and her husband in 1956. New Balance arch supports were becoming famous amongst athletes in 1960, and some began to approach the brand to request custom sneakers. The sneakers were released in 1961 and were the first running shoe to feature a rippled sole for traction. This move inspired Eleanor and her husband to design the first New Balance sneakers called the Trackster. The company provided this sneaker in different sizes to fit all athletes, and it was soon a top choice by many schools and colleges for track and cross-country. Despite the success of the Trackster, the company was yet to hit the mainstream sneaker market. The company was a pretty small operation run by six people, so sales were slow. However, Jim Davis purchased the brand in 1972 and steered it into one of the biggest brands in the world. New Balance Expansion For a complete Nike vs New Balance comparison, a review of New balance expansion is necessary. Jim acquired the company at the ideal time. The company began to release more runners each year, and the sneakers were available in different widths. The company also started using model numbers instead of names for their sneakers. This number defined the shoe type, the activity it was ideal for, and if it was ideal for speed, arch support, or stability. In 1976, the company launched its first sneaker to feature the N logo. People voted this sneaker the number one running shoe in the market, leading to a global breakthrough for the brand. By the 80s, the brand has several product ranges, including walking shoes and clothing like the Gore-Tex running jacket. The brand also released its most famous sneakers, the 574, during this period. Although this was initially a technical shoe, it became famous off the running track. To date, New Balance continues to cement itself in sportswear and many popular cultures by releasing many successful sneakers. Nike vs New Balance – The Main Differences Nike and New Balance have many similar products that feel and fit differently. Most times, the difference is in their marketing practice. Both brands are excellent choices for training and race, but to make a more specific Nike vs New Balance comparison, we’ll be delving into some of the particular shoe details of both brands to see how they differ. Upper The Upper on New Balance shoes combines mesh and suede or mesh and synthetic material. This combination usually provides enough stability for the foot to stay in place, allowing for flexibility. The perforation and the mesh ensure better air circulation for the feet while preventing hotspots. Overall, New Balance shoes keep your feet as cool as necessary. On the other hand, Nike uses an engineered Mesh featuring Nike Flyknit material or their ultra-light ripstop fabric. This material is lighter in some parts of the feet to ensure ample air circulation while remaining flexible. Sometimes, they feature the brand’s Flywire and Dynamic Fit Technology. This technology wraps around the arch and mid-foot to give wearers snug feet. When you tighten the laces, it makes the feet like the light they’re being hugged. Midsole New Balance uses a midsole foam technology that can make the wearer feel like they’re walking on clouds. They use Fresh Foam X, which provides a level of cushioning and responsiveness that makes the legs feel fresher. Many of their models like the 880s, the 1080s, and more feature this technology. Some of their shoes also feature the FuelCell Foam that provides speed for anyone looking for a great energy return. Nike’s Air technology has been the bedrock of their cushioning for decades. The brand listens to their runners’ wants and improves their technology, creating the Nike React technology. This technology uses foam that is soft and provides a great energy return. It features zoom bags available at the forefoot or heel to ensure a more comfortable ride. However, if the New Balance Shoe makes you feel like you’re running on clouds, Nike makes you run on air in this Nike vs New Balance comparison. Cushioning The ideal cushioning comes down to the wearer’s personal preference. Some runners prefer a firm, responsive cushioning, while others want a cushioning that makes them feel like they’re walking on clouds. Both brands have received positive feedback from their buyers. They aim to provide ample cushioning to reduce the risk of injury while walking or running. Both sneaker companies provide shoes that run the entire length of the shoe. They also have shoes where the cushioning offers more support, either heel or forefoot. Overall Fit and Comfort The brand is also famous for ensuring support, comfort, and stability in their shoes so you can wear them all day. The many options ensure their product range covers all runners. Nike is famous for providing comfortable shoes that increase speed and is relatively easy on the feet. However, the shoes can become narrow from the midfoot to the toe. On the other hand, you can buy New Balance shoes in a wide or extra wide size, providing enough space to waffle your toes. Many doctors also recommend New Balance shoes for several foot conditions. Many athletes offer feedback to the companies after wearing their shoes, and the companies use this feedback to improve the comfort and performance of their shoes. Final Thoughts When it comes to the Nike vs New Balance comparison, it’s hard to determine which brand is a better option. Both brands are well established and quite reputable. They also use several technologies to improve their shoes and cater to their customers’ unique needs. The right brand for you isn’t necessarily the ideal choice for the next runner. This Nike vs New Balance comparison aims to help you compare and decide which brand works best for you.

  When you’re looking for the ideal running shoe, the question of which brand is the perfect option for you always pops up. A Nike vs New Balance comparison is important to determine which brand’s technologies, feel and fit are right for you. Both brands have a long history of what people love and don’t want. In the elite world, Nike has been dominating for decades. However, New Balance seems to be here to stay. This article explores both brands’ history and factors that differentiate each brand. Without further ado, let’s dive in.

Humble Beginnings

Nike began with Bill Bowerman and Phil Knight. At first, Bill Bowerman is a track and field coat at the University of Oregon. He reunited with Phil Knight after a brief stint at Standford University. Bowerman wanted athletic footwear and running shoes that were optimized for performance. Due to this, he began to work with varying models after he learned some tips from a local cobbler. In 1964, Knight and Bowerman decided to create Blue Ribbon Sports, an Oregon-based footwear company that operated for many years from the back of a car at varying track meets.

They started as a distributor for different imported shoes like Onitsuka Tiger. Knight was always amazed at the quality of their trainers and found them unique in a market dominated by German sneakers. While the world was trying to decide their favorite between Adidas and Puma, Knight turned to Onitsuka Tiger for premium running trainers. After a couple of years of being Onitsuka’s sole distributor in America, there was a rise in competition. This led the duo to think of new ways they could stand out from the crowd. Blue Ribbon Sports became Nike in 1971, and they decided to launch their trainer. Bowerman had always created trainers for the athletes he coached. After researching Onitsuka Tiger shoes and thinking of different ways he could change things for Nike, he started working on a prototype that would become the first-ever Nike sneaker.

The First Nike Shoes

The Nike vs New Balance comparison won’t be complete without mentioning Nike’s first shoe. Bowerman designed the first Nike Shoe and named it Moon Shine. However, this shoe was made in Bowerman’s waffle iron. The sole waffle design was inspired while Bowerman was eating breakfast one day. He began to wonder if the grooves in his waffle would provide extra traction while playing sport. After some test runs with his waffle iron, the Waffle Trainer came to be. It was a massive success from the beginning because of the grip it offers and its performance-driven design. The prototype model was technically the first Nike shoe. This prototype sold for almost $450,000 at Sotheby’s.

Nike Expansion

By 1976, Nike was ready to expand. Therefore, the brand hired John Brown and Partners, a Seattle-based ad company, to help with exposure. A year later, the ad agency created the first ad for Nike titled ‘There is No Finish Line.’ Although there were no close-up Nike shoes in the ad, it was a success and propelled the brand further into the limelight. By 1980, Nike owned a 50% market share in the US athletic shoe market. Later that year, Nike went public as a company. 

After the popularity of its sneakers, Nike decided to expand into the clothing world. It released a line of athletic and sportswear in 1979, and one of the first pieces was the Windrunner. This jacket was lightweight and quickly became a favorite for many people. In 1982, the company partnered with another advertising agency to push its reach into new territories. During one of the campaigns, the slogan ‘just do it’ was created, and it became the brand’s slogan to date.

One of the brand’s most significant assets was the many celebrity endorsements. The company signed many athletes like Lebron James, Tiger Woods, and Kobe Bryant quite early in their carrier. However, the brand’s most lucrative endorsement was with Michael Jordan. The bran swooped in with an endorsement from Jordan at the start of his first seasons. Although Jordan was harboring hope for a deal with Adidas, he signed for a payment of $500,000 

each year for five years, shoes customized to his request and two Mercedes car. It was an excellent hit for Nike as Jordan rose to stardom. Air Jordans hit the market and made over $100 million in revenue. To date, Air Jordans continue to make money for the brand. 

Nike vs New Balance – New Balance History

The history of New Balance is one of business savvy and tenacity. It begins with a man in Boston who drew inspiration from farm animals and started a company that fast became a cultural fixation. New Balance began as New Balance Arch Support in 1906 and was founded by William J Riley. Riley is an Irish immigrant who resided in Boston. After watching chickens move around his backyard, he drew inspiration for his first product. He was fascinated by how the chickens achieved a perfect balance on their three-pronged feet. Therefore, Riley created flexible arch support with three support points. 

In 1927, he hired a salesman called Arthur Hall. Borth of them became partners in the company by 1934. At this point, New Balance provided arch support to workers who had to stand for long periods. The company didn’t dabble in sneakers at the time. Over time, Hall sold the company to his daughter Eleanor and her husband in 1956.

New Balance arch supports were becoming famous amongst athletes in 1960, and some began to approach the brand to request custom sneakers. The sneakers were released in 1961 and were the first running shoe to feature a rippled sole for traction. This move inspired Eleanor and her husband to design the first New Balance sneakers called the Trackster. The company provided this sneaker in different sizes to fit all athletes, and it was soon a top choice by many schools and colleges for track and cross-country. 

Despite the success of the Trackster, the company was yet to hit the mainstream sneaker market. The company was a pretty small operation run by six people, so sales were slow. However, Jim Davis purchased the brand in 1972 and steered it into one of the biggest brands in the world. 

New Balance Expansion

For a complete Nike vs New Balance comparison, a review of New balance expansion is necessary. Jim acquired the company at the ideal time. The company began to release more runners each year, and the sneakers were available in different widths. The company also started using model numbers instead of names for their sneakers. This number defined the shoe type, the activity it was ideal for, and if it was ideal for speed, arch support, or stability. In 1976, the company launched its first sneaker to feature the N logo. People voted this sneaker the number one running shoe in the market, leading to a global breakthrough for the brand. 

By the 80s, the brand has several product ranges, including walking shoes and clothing like the Gore-Tex running jacket. The brand also released its most famous sneakers, the 574, during this period. Although this was initially a technical shoe, it became famous off the running track. To date, New Balance continues to cement itself in sportswear and many popular cultures by releasing many successful sneakers. 

Nike vs New Balance – The Main Differences

Nike and New Balance have many similar products that feel and fit differently. Most times, the difference is in their marketing practice. Both brands are excellent choices for training and race, but to make a more specific Nike vs New Balance comparison, we’ll be delving into some of the particular shoe details of both brands to see how they differ.

The Upper on New Balance shoes combines mesh and suede or mesh and synthetic material. This combination usually provides enough stability for the foot to stay in place, allowing for flexibility. The perforation and the mesh ensure better air circulation for the feet while preventing hotspots. Overall, New Balance shoes keep your feet as cool as necessary.

On the other hand, Nike uses an engineered Mesh featuring Nike Flyknit material or their ultra-light ripstop fabric. This 

material is lighter in some parts of the feet to ensure ample air circulation while remaining flexible. Sometimes, they feature the brand’s Flywire and  Dynamic Fit Technology . This technology wraps around the arch and mid-foot to give wearers snug feet. When you tighten the laces, it makes the feet like the light they’re being hugged.

New Balance uses a midsole foam technology that can make the wearer feel like they’re walking on clouds. They use Fresh Foam X, which provides a level of cushioning and responsiveness that makes the legs feel fresher. Many of their models like the 880s, the 1080s, and more feature this technology. Some of their shoes also feature the FuelCell Foam that provides speed for anyone looking for a great energy return.

Nike’s Air technology has been the bedrock of their cushioning for decades. The brand listens to their runners’ wants and improves their technology, creating the Nike React technology. This technology uses foam that is soft and provides a great energy return. It features zoom bags available at the forefoot or heel to ensure a more comfortable ride. However, if the New Balance Shoe makes you feel like you’re running on clouds, Nike makes you run on air in this Nike vs New Balance comparison. 

The ideal cushioning comes down to the wearer’s personal preference. Some runners prefer a firm, responsive cushioning, while others want a cushioning that makes them feel like they’re walking on clouds. Both brands have received positive feedback from their buyers. They aim to provide ample cushioning to reduce the risk of injury while walking or running. Both sneaker companies provide shoes that run the entire length of the shoe. They also have shoes where the cushioning offers more support, either heel or forefoot. 

Overall Fit and Comfort

The brand is also famous for ensuring support, comfort, and stability in their shoes so you can wear them all day. The many options ensure their product range covers all runners. Nike is famous for providing comfortable shoes that increase speed and is relatively easy on the feet. However, the shoes can become narrow from the midfoot to the toe. On the other hand, you can buy New Balance shoes in a wide or extra wide size, providing enough space to waffle your toes. Many doctors also recommend New Balance shoes for several foot conditions. Many athletes offer feedback to the companies after wearing their shoes, and the companies use this feedback to improve the comfort and performance of their shoes. 

Final Thoughts

When it comes to the Nike vs New Balance comparison, it’s hard to determine which brand is a better option. Both brands are well established and quite reputable. They also use several technologies to improve their shoes and cater to their customers’ unique needs. The right brand for you isn’t necessarily the ideal choice for the next runner. This Nike vs New Balance comparison aims to help you compare and decide which brand works best for you.

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New Balance Athletic Shoe, Inc. – Case Solution

New Balance is one of the world's five largest manufacturers of athletic shoes. It is considering if it should respond to Adidas' planned acquisition of Reebok. The acquisition would result in the consolidation of the second and third-largest companies in the footwear industry. This case study discusses the unique sides of New Balance's strategy which highlights fit and performance. Now, New Balance is facing the challenge of whether to change strategy in light of the recent development in its competitors' consolidation move.

​H. Kent Bowen; Robert S. Huckman; Carin-Isabel Knoop Harvard Business Review ( 606094-PDF-ENG ) April 20, 2006

Case questions answered:

Case study questions answered in the first solution:

  • What are the key elements of New Balance Athletic Shoe, Inc.’s current operations strategy? What are the key assumptions and decisions implicit in this strategy? Please be specific.
  • What key OMT philosophies, concepts, frameworks, tools, and insights can be used to analyze the situation at New Balance? Please be precise and remember to use the appropriate terminology and related case references.
  • What is your assessment of the implications (financial and strategic) of the decision to keep 25% of manufacturing in the US? Assume that the US market for athletic footwear was 400 million in 2005.
  • What should New Balance do about Adidas’ planned acquisition of Reebok and the NB2E initiative? What aspects of operations strategy may need to change and why?
  • What would be needed to implement your recommendations? How would you handle the related risks?

Case study questions answered in the second solution:

  • Evaluate New Balance’s current operations strategy. What are the key decisions implicit in this strategy?
  • Assuming that the total U.S. market for athletic footwear was 400 million pairs in 2005, how costly was New Balance’s decision to maintain 25% of its manufacturing in the United States? What is your assessment of that decision?
  • How should Davises react to Adidas’ planned acquisition of Reebok? What aspects of New Balance’s operations strategy should they change?
  • Moving forward, how important is the NB2E initiative for New Balance?

Case study questions answered in the third solution:

  • How should New Balance respond to the Adidas/Reebok transaction?
  • How has New Balance’s operations strategy supported its competitive objectives?
  • What is your assessment of the company’s objectives for the NB Executional Excellence initiative?

Not the questions you were looking for? Submit your own questions & get answers .

New Balance Athletic Shoe, Inc. Case Answers

You will receive access to three case study solutions. The second and third solutions are not yet visible in the preview!

1. What are the key elements of New Balance Athletic Shoe, Inc.’s current operations strategy? What are the key assumptions and decisions implicit in this strategy? Please be specific.

We know that an operations strategy is a framework/plan for utilizing the available resources that will drive the business execution. It basically is a way to align your resources according to your strategy. New Balance Athletic Shoe, Inc. was committed to delivering high-quality products that meet the demands of performance-oriented runners, unlike the industry norm, which was more focused on the fashion trend of the shoes.

Thus, they align their operations accordingly by committing to operations and manufactured-based strategy to deliver high-quality products that performance-oriented individuals can rely on and use reliably for a longer time.

Some of the key elements and the inherent assumptions and decisions in their operations strategy are as follows:

1. Unlike its competitors (Nike and Adidas), New Balance Athletic Shoe, Inc. was spending very little on marketing its products and was more focused on the cutting-edge R&D and manufacturing aspects of its products.

Because it believed (assumption) that its customers were performance-oriented and would want high-quality products and less focused on the fashion aspects of the shoes.

This is also why it did not endorse sports personalities. It did not want to spend extra money on advertising the product rather than deliver a high product to its distributors and retailers, who can then have a loyal customer base because of the high-quality product.

2. New Balance Athletic Shoe, Inc. acquires 75% of its finished goods from China, and the remaining 25% are assembled in its USA-based factories. However, the raw material for in-house shoes was also procured from China but was assembled here.

The two variants that were made in-house were much more expensive than those procured from China ( $13 and $0.5). We believe that the reason for this is that New Balance wanted some control over a certain portion of its finished goods. Also, the lead times associated with in-house products were much lower than the ones sourced from China.

Furthermore, New Balance Athletic Shoe, Inc. was also constantly updating its foreign vendors with the learnings that it got by producing in-house, thus enhancing its suppliers’ capabilities.

3. Although one must have lower inventories for low costs, at times, a business can lose out on a significant portion of its sales. It does have a certain product in stock when it is in high demand.

Thus, catering to this aspect, New Balance Athletic Shoe, Inc. stocked huge inventories to meet the retailers’ uncertain demands. We also believe that this strategy is also enhancing the relationship between retailers and New Balance, as they rely on them for providing products anytime.

New Balance Athletic Shoe, Inc. was also looking to further improve its value proposition by reducing the overall lead times.

4. NB had an entrepreneurial culture and wanted to improve and innovate continuously, thus keeping this in view. They outsourced a network of expert Salesforce with an entrepreneurial mindset to improve their sales and distribution processes.

2. What key OMT philosophies, concepts, frameworks, tools, and insights can be used to analyze the situation at New Balance? Please be precise and remember to use the appropriate terminology and related case references.

If we analyze the sense of purpose, i.e., their objectives, Vision, and Mission, we note that they want to deliver high-quality products by emphasizing R&D and meeting the needs of performance-oriented runners. Their product strategy was clear that they would not cater to fashion trends of the industry but rather focus on the product’s performance aspect.

Although we do notice that in the shoe market, customers value “Time to market” very highly because they want up-to-date trendy products, this is unlike Sports Obermeyer, where we saw that it was more focused on meeting the fashion trends of the market on time by managing the production of its products in several stages to get more information about the demand.

New Balance Athletic Shoe, Inc. has differentiated itself from competitors (Nike and Adidas) by focusing on the shoe business’s manufacturing and operations aspect and not on the marketing side.

Because they believe that they cannot overtake these marketing giants by following a marketing-based strategy, as these big players possess more financial resources than New Balance.

Thus, they have focused on their core competencies to achieve differentiation through manufacturing and operations-based strategy. Thus, through this focused strategy, New Balance Athletic Shoe, Inc. can achieve process efficiencies and learn by limiting its scope, thus leading to specialization.

From Toyota Production Systems’ philosophy, we have learned that “People (workforce) are the most important assets.” It is important to inculcate a problem-solving mindset in your employees to not rely on individual heroics when a problem arises. Rather, every employee should be prepared to deal with contingencies and resolve the problem’s root cause.

New Balance Athletic Shoe, Inc. has instilled an entrepreneurial culture and empowered its employees, ultimately resulting in quick decision-making. They have also developed a “Teamwork” culture because they have cross-functional teams. Thus, people with different skills must be able to solve problems together and add to every other individual’s overall learning on the team.

They also believe in the “continuous improvement” mantra, which is kaizen, as they want to take risks and build upon what they have already done and performed.

On analyzing their “Product design and development ” strategy, we noticed that they worked along two dimensions. One was further to enhance the quality aspects of the existing models. The second effort was made towards incorporating new technologies and features into the upcoming products.

Thus, New Balance Athletic Shoe, Inc. was trying to

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Watch CBS News

Nike sues New Balance and Skechers over patent infringement

By Khristopher J. Brooks

Updated on: November 7, 2023 / 4:45 PM EST / MoneyWatch

Sports apparel giant Nike is suing two of its competitors, arguing that New Balance and Skechers are wrongfully using technology that Nike developed for making shoes light-weight and strong. 

Nike filed two patent infringement lawsuits on Monday, one in federal court in Massachusetts against  New Balance and another federal suit in California against  Skechers . The cases come after Nike sued Puma in 2018, Adidas in 2021 and Lululemon this year over the same issue. 

Nike's lawsuit focuses on Flyknit, a special type of fiber the company developed and which it uses for the so-called upper of shoes, or the parts of a shoe above the sole and which cover the foot. Flyknit is a high-strength fiber that supports the user's feet but is also lightweight and breathable, according to Nike . 

Nike said in court documents that Flyknit took more than a decade of research to develop and helps the company reduce materials waste. Nike has saved 3.5 million pounds of waste since Flyknit's launch and diverted 182 million plastic bottles from nine landfills by switching to recycled polyester in all Nike Flyknit shoes, according to a 2016 analysis from New York University.

Nike said in court documents that the company has sent cease-and-desist letters to New Balance this year regarding Flyknit, but alleged that "New Balance's infringement is accelerating in breadth and scope despite notice from Nike."

"Due to the success of Nike's Flyknit, many of Nike's competitors have copied and made unauthorized use of Nike's Flyknit technologies," Nike lawyers claim in the Skechers lawsuit. "Skechers has likewise used Nike's Flyknit technologies without authorization."

Flyknit patents

Nike said in its lawsuits that it owns the Flyknit technology through nine patents filed between September 2012 and July 2023. Nike accused New Balance of using Flyknit to sell certain footwear, including the Fresh Foam X 1080 v12, the Fresh Foam X Vongo v5, the FuelCell SuperComp Trainer and the Tekela v4 Magia FG. In the lawsuit against Skechers, Nike alleged Skechers infringed upon Flyknit technology by selling its Ultra Flex 3.0, the Glide Step Sparkle and other shoes. 

Nike didn't immediately respond to requests for comment Tuesday. In a statement e-mailed to CBS MoneyWatch, Skechers declined to comment on the lawsuit. 

New Balance told CBS MoneyWatch in a statement Tuesday that it "fully respects competitors' intellectual property rights, but Nike does not own the exclusive right to design and produce footwear by traditional manufacturing methods that have been used in the industry for decades."

Nike wants a federal judge to block New Balance and Skechers from selling shoes with copied Flyknit material. In the lawsuits, Nike has also asked for "an award of damages," but didn't specify a dollar amount. 

Nike settled its Flyknit lawsuit against Adidas in August 2022 and settled its Puma case in January 2020. Nike's case against Lululemon, which began in January, is ongoing. 

Khristopher J. Brooks is a reporter for CBS MoneyWatch. He previously worked as a reporter for the Omaha World-Herald, Newsday and the Florida Times-Union. His reporting primarily focuses on the U.S. housing market, the business of sports and bankruptcy.

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Persistence and Sneakers 2013 Case Study

Relevant cash flows for Sneaker 2013 are those that are directly associated with the project. Among such cash flows are sales of Sneaker 2013, variable costs, an increase in inventory, an increase in accounts payable, the cost of equipment that needs to be purchased and its installation, the cost of building a factory in Vietnam, the interest cost on debt which needs to be employed to finance the project, and the advertising and promotion costs. Tax expense is also a relevant cash flow as it concerns Sneaker 2013 project. The reduction in sales of existing New Balance shoes should be regarded as the lost revenue, which is also incremental cash flow. Even though the cost of equipment and its installation and the cost of real estate are depreciated, depreciation is not a cash flow. $2 million spent on research and development on Sneaker 2013 is a sunk cost that should be ignored.

Relevant cash flows for Persistence include revenue generated from sales, an increase in the working capital, the cost of equipment, the cost of the design technology and manufacturing specifications for a new hiking shoe, interest expense on debt, taxes, and net income after tax. The allocation of overheads associated with the use of the company’s factories is a sunk cost and not a component of relevant cash flows. There is no opportunity cost as the introduction of the product is not expected to impact the existing sales. Depreciation is a non-cash item, which is why it is not a relevant cash flow.

The net present value of a project can be calculated as the difference between the present value of future cash flows and the initial cost of investment. The initial cost of investment includes the cost of equipment and its installation (15 million in total), the cost of building a factory in Vietnam (150 million), and an increase in the working capital, which is equal to the difference between an increase in current assets and an increase in current liabilities. The initial cost of investment for Sneaker 2013 can be calculated as:

Tables 1 and 2 show total cash flows and discounted cash flows for Sneaker 2013 for 2013-2018. Revenue was calculated by multiplying sales volume by net price. Gross profit was calculated by subtracting variable costs from revenue. Tax expense was calculated by multiplying the tax rate by income before taxes. Discounted cash flows were calculated using the following formula:

Table 1. Cash Flows for Sneaker 2013.

Table 2. Discounted Cash Flows for Sneaker 2013.

At the end of the project, the company will gain an additional 115,000,000 million if it sells the equipment and the factory and recovers the working capital. Thus, the NPV of the project is:

The lost revenue (or opportunity cost) is equal to the lost sales multiplied by the gross margin:

The IRR can be calculated by solving the following equation for R:

Using What-If analysis in Excel, the value of R is equal to 48.35%, which is the internal rate of return for Sneaker 2013.

The payback period is calculated by subtracting each individual annual cash inflow from the cost of investment until a positive amount is achieved. The payback period for Sneaker 2013 is equal to five years (see Table 3).

Table 3. Cumulative Cash Flows for Sneaker 2013.

The discounted payback period is calculated similarly to the payback period, yet the annual cash flows are discounted. The discounted payback period for Sneaker 2013 is equal to six years (see Table 4).

Table 4. Cumulative Discounted Cash Flows for Sneaker 2013.

Profitability index for Sneaker 2013 is equal to:

The initial cost of investment for Persistence includes the cost of manufacturing equipment (8 million) and an increase in the working capital (15 million). The initial cost of investment for Persistence is equal to:

Tables 5 and 6 show total cash flows and discounted cash flows for Persistence for 2013-2015. Total sales were calculated by multiplying the total sales for the athletic footwear market by the market share projections for Persistence with consideration of the annual growth rate. The gross profit was calculated by subtracting variable costs from total sales. Purchase of intangible assets is recognized as an immediate expense, which is why it is not amortized. The tax expense was equal to zero in 2013 since the company did not generate any income.

Table 5. Cash Flows for Persistence.

Table 6. Discounted Cash Flows for Persistence.

At the end of the project, the company will gain an additional 17,320,000 if it sells the equipment and recovers the working capital. Thus, the NPV of the project is:

Using What-If analysis in Excel, the value of R is equal to 42%, which is the internal rate of return for Persistence.

The payback period for Persistence is equal to three years (see Table 7).

Table 7. Cumulative Cash Flows for Persistence.

The discounted payback period is equal to three years (see Table 8).

Table 8. Discounted Cumulative Cash Flows for Persistence.

Profitability index for Persistence is equal to:

Tables 9 and 10 show the capital budgeting cash flow statements for Sneaker 2013 and Persistence, respectively.

Table 9. Projected Capital Budgeting Cash Flow Statement for Sneaker 2013 for 2013-2018.

Table 10. Projected Capital Budgeting Cash Flow Statement for Persistence for 2013-2015.

Sneaker 2013 can be considered a more attractive choice for New Balance shareholders because it offers a higher return on the initial investment and has a greater net present value. Even though the implementation of Sneaker 2013 entails the revenue loss, which is equal to 20 million, this project is expected to generate more positive cash flows, compared to Persistence. On the other hand, Persistence is a good option, too, because its profitability index is slightly higher and its net present value is positive. However, the main reason why Persistence is worse than Sneaker 2013 is that it has a too high cost of intangible assets that should be purchased immediately.

Based on all the above-said, Rodriguez may be recommended to undertake Sneaker 2013. Despite the fact that this project is slightly less profitable, its internal rate of return and net present value are much higher. If the company found a way to minimize costs associated with the purchase of the design technology or the project had a longer life cycle, Persistence could be a more feasible choice. As for now, however, shareholders will gain more from Sneaker 2013 than from Persistence.

  • Chicago (A-D)
  • Chicago (N-B)

IvyPanda. (2023, February 13). Persistence and Sneakers 2013 Case Study. https://ivypanda.com/essays/sneaker-2013-and-persistence-case-analysis/

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Bibliography

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