Jennifer Norcutt Case Study Week One MBA 622 Operations Management May 26, 2013 Hitting the

e Wall: Nike and International Labor Practices Nike began as a sneakers company and experienced explosive growth in the 1970s and 1980s. Revenues at Nike grew from a level of $600,000 in 1972 up to $49 million in just 10 years. Nike was able to differentiate itself from its competitors by using a unique two-prong approach; outsourcing the production and then using all the money saved and putting that into marketing. Nike first sub-contracted the production to manufacturers in Japan, but Japan was becoming a richer country and Nike subsequently moved manufacturing to less-developed countries such as China and Indonesia. With less-developed countries come lower wages and less governmental restrictions. This was the beginning of the downward spiral for Nike. It was in the late 1980s that Jeff Ballinger began spear-heading a secret campaign to air the dirty laundry that was Nike. Ballingers arguments about Nike were very convincing. Ballinger had long been a labor activist and strongly believes that all companies have an obligation to its lower position workers. He also believed that Nikes policy of competing on costs causes many issues in the workplace. Some issues included production quotas that were impossible to meet and 17,000 labor violations, but yet only 12 were actually prosecuted. With Indonesia being a developing country many violations are swept under that rug due to widespread corruption. Nikes response to Ballingers claims was simply that they are not responsible for the labor violations or low wages because they are not the one manufacturing the products. Nike

went so far as to state that the company could not be held responsible for the actions of independent contractors (Spar, 2002). But it did not take long for Nike to begin realizing the severity of the labor issues. For the first time Nike began taking some proactive steps in response to Ballingers claims. They first drafted regulations into a code of conduct for their independent contractors and then addressed working conditions, safety standards and worker insurance. After all these measures taken by Nike it was nowhere close to what Reebok was doing. Reebok was far ahead of Nike when it came to their social responsibility. Reebok created a human rights award, extensive guidelines, and specific standards and occasional audits. When the issues first came abreast Nike handled the publicity surrounding it very poorly. Nike took a very defensive stance in the resolution of the minimum wage issue and the safety issues of the subcontractors. Nike should have taken a much more proactive stance like one of its major competitors, Reebok. Nike is not the only company to outsource its production overseas, but they are very likely one of the most notorious. Not all wages appeared to be low in developing countries. A Dartmouth student survey of factory workers in Vietnam found that Factory workers, after incurring essential expenditures, can generate a significant amount of discretionary income (Spar, 2002, p. 10). However, it was found that these workers were not considered the primary breadwinners within the family. The income these workers make is used to supplement the income from other members of the family. The income allows those families to purchase items such as new furniture or put into a savings account. In a developing country such as Vietnam the data supports the view that Nike is playing a large role in furthering the progress of this developing country.

The issues with Nike are a catch 22. If they are to raise wages their contribution margin would increase and likely cause them to raise the price of their products even more. The more they raise the wholesale or retail price the greater likelihood they would sell fewer units. Less demand would force them to produce less which would mean less need for workers. Fewer workers could mean less capital streaming into the economies of the developing nations. The way this students sees it; they are darned if they do and they are darned it they dont.

Works Cited
Spar, D. L. (2002). Hitting the Wall: Nike and International Labor Practices. Harvard Business School, 23.