Hitting the Wall: Nike and International Labor Practices

Jennifer Norcutt Case Study – Week One MBA 622 Operations Management May 26, 2013 Hitting the Wall: Nike and International Labor Practices

 Nike began as a sneakers company and experienced explosive growth in the 1970’s and 1980’s. 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 differentiate itself from 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 sub-contracted the production to manufacturers in in Japan, but Japan was  becoming a richer country and Nike subsequently moved manufacturing to less-developed countries such as China and Indonesia. Indonesia. With less-developed countries come lower wages and less governmental restrictions. restrictions. This was the beginning of the downward spiral for Nike. -heading a secret campaign to air  It was in the late 1980’s that Jeff Ballinger began s pear -heading the dirty laundry that was Nike. Ballinger’s arguments about Nike were very convincing.

Ballinger had long been a labor activist and strongly believes that all companies h ave an obligation to its lower position workers. He also believed that Nike’s Nike’s policy of competing on

costs causes many issues 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.  Nike’s response to Ballinger’s 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 Ballinger’s 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 “Factor y workers, af ter incurring essential expenditures, can generate a significant amount o f 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 the y do and they are darned it they don’t.

Works Cited

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