Critical individual essay

Case study: Nike Inc.

Introduction

A trend of outsourcing to minimizing the cost and maximising the profit becomes
the general business model in modern corporations. The organisation aims to
expand internally their production and manufacturing to the low labour wage
level and competitive production costs, especially Chian and South East Asian.
Even though the direct benefit of outsourcing to lower cost product sites, the
hidden issues are related to the complexity of networking, long distance
management, business goals alignment, compatibility, and sustainability. The
organizational theory can be applied to estimate the risk though the shareholder
behaviours that can assist in decision-making for business cooperation
(Christensen & Raynor 2003). This study uses the Nike Inc. as the case study of
using agency theory and stewardship theory to assess the current issues and its
possible recommendations. These two theories have a strong correlation but
they address in different domains. To assess the issue caused by the complexity
of business network of Nike, these theories will help Nike to establish the risk
management to moral hazard on their business.

Company background and current situation of Nike Inc.

Nike Inc. was established in 1962 by Bill Bowerman and Phil Knight and today
becomes one of the most recognizable companies in the world. Nike offers all the
athletic shoes, sport apparel, and accessories. In addition, Nike is the largest
sellers of athletic footwear and apparel in the world positioned with more than
50% of market-share. In 2015, Nike has 62,600 employees worldwide and more
than 790 contracted manufactures over 40 countries to sever their entire supply
chain.
Nike is considered one of the outstanding sustainability initiatives since they had
been public captured and criticised the issue of fair and equality labour wage
across their shareholders in 1998 (Porteous & Rammohan 2013) . Nike improved
their sustainability model and concern the public voice and issues on
environment, social, and employees. They have been working with both
government and non-governmental organisation to improve that situation. With
15 years of their journey, Nike has success improved and gained their
sustainability and innovation.
The main issues of Nike during end of 2000 was the lack of transparency from
the top management, their employees throughout the contracted manufactures
outside US. Nike integrated their corporate responsivity teams to get involve in
management decision-making with high consideration of sustainability in every
stage of Nike supply chain. Nike also set their internal KPI or sustainability
indexes to assist the decision-making on raw material selection, partners or
contracted manufactures, country of partners, footwear, and apparel (Connolly
2015). With the internal KPIs, Nike is able to control their shareholders though
this sustainability initiative. Moreover, Nike have been developed their new
products based on a disruptive innovation model to build the new market disrupt
on existing customers. As a result, Nike became one of the top innovate
companies in the world (Carr 2013). With this high attempt from Nike inside-out,
Nike has significantly improved their sustainability and innovation and resulted
positive public response on their issues of labour practices, environmental and
social impacted, and sustainability related.

Agency theory, issues identification, and recommendations

Agency theory or a principal-agent model is used as a theoretical framework for

structure and managing contract relationships as well as the relationship
explanation between both (Alchian & Demsetz 1972; Eisenhardt 1989).
Therefore, this model has widely applied in the organization who creates the
contractual relations between directors, manager, employees though the
external contractors (Lee & O'neill 2003). In this theory, a principal chooses their
contract with an agent based on their decision on cost effective and agents
expertise. The benefits have been shared between principle and agent. This
situation is same as Nike to seek their agents or contract manufactures as they
realised that the cost of building their own manufactures exceeded the costs of
hiring or contracting with outsources. However, Nike have their own criteria to
evaluate the prospect factories based on their quality, sustainability, and risk of
country. Once the agreement between Nike and contract factory on inputs,
processes, outcomes, quality, monitoring, report, other requirements have been
made, the contract factory starts the productions. However, the benefit of
dealing with Nike can be both direct and indirect benefits. For direct benefit
includes the product cost and promise target quantity of production results of
lower risks. For the indirect benefits include the technology transfer, know-how,
and reputation. Therefore, the agent (contracted factory) may find the way of
compensation of producing the products for Nike (with competitive cost under
contract). The agent pursues their own goal more than aims to the Nikes
objectives (Lund-Thomsen & Coe 2013). For Nike case study; there are two
assumptions can be made;

The goal conflict between the budget or profit-maximising behaviour of

the Nike and the utility maximizing behaviour of the contract
factories(Tosi, Katz & Gomez-Mejia 1997).
The contract factories look forward their own business growth rather than
for the collective interests of Nike that lead to the moral hazard problem
(use Nike technology for self-purpose) eventually (Dye & Sridhar 2005).
Application of agency theory can help Nike to manage their outsources (agents)
effectively by controlling the agent behaviour and their interests aligned with
Nikes goals (Luhman & Cunliffe 2012). Based on the risk may occur in terms of
the agency theory perspective, my recommendation to Nike can be divided into
two key stage; pre-contractual and post-contractual. For pre-contractual stage,
Nike ensure the risk of particular contract factory is minimised and the
opportunity is maximised. At the current Nike system they select using the
manufacturing index to measure the factory performance using a balanced
scorecard including cost, delivery, quality, and sustainability. Nike should
cooperate with the risk assessment embedded into this criteria. Nike only looks
for the risk of country with country risk index to measure the country risks of
politic, social, economic, infrastructure, and climate. The risk of non-alignment in
policy and personal interests should be assessed and analysis. Moreover, the
opportunity that Nike could help the contract factory in long terms period should
be identified. The situation of win-win benefits must be concern. For example,
the opportunity for extending the product lines, support multi-brand productions
to gain the contract factory profit, training and education as well as the
technology transfer. For post-contractual stage, Nike should ensure the action of
contract factory is taken with strong alignment with Nike policies, local
regulations, sustainability concern, social, and honestly (Esbenshade 2001). The
gap distance and differential of cultures should be closely monitored and Nike
seeks for its optimisation. Evaluating the Nike case study through the agency
theory, Nike needs to create the special teams to support the contract factories
(their agents), understanding insight of their needs, and the opportunity in
business growth with Nike. This will reduce the risks of the principle/agent
relations and minimum the confliction between them. Equality and fair issues
should be considered to remain the same standards across the contract factories
(Frenkel & Kim 2004).

Stewardship theory, issues, and recommendations

Another organisational theory is stewardship theory that uses to examine the

relationship and behaviour of organisation focusing on the manager or directors.
It can be said that the stewardship theory is alternative view of the agency
theory (Davis, Schoorman & Donaldson 1997). The situation of issue in
stewardship theory is, for example, manage uses the asset or expense of
shareholders for their own interest. The key assumption on Nike case study
through the stewardship theory lens includes the long-term contractual relations,
collective goals, involvement and alignment. Note that, this is a strong link with
the previous sections; analysis through the agency theory. However, the
stewardship theory address the collective goals rather than individual goals,
principle decision making based on principles interest. Looking the
accomplishment of contract factories of Nike, an incentive of achieving
alignment conducted, and maximising the contract factories unities are
addressed (Davis, Schoorman & Donaldson 1997). Basically, the stewards are
motivated bay rewards, trustiness, reputation, job satisfaction, stability and
mission alignment (Bramston, Pretty & Zammit 2011). Note that, the stewardship
theory relies on the principle-stewards relationship.

The current issue of Nike under this theory analysis can be assumed as the lack
of organisational goals and objectives achieved through the stewardship (or
mangers at contract factories) with initial trust disposition. As Nike has a large
scale of shareholders, this issue becomes more different to promote the
involvement-orientation management philosophy through the network. The
different environment, culture, individual goals, psychology, and sociology make
this problem becomes more complex. However, the fundamental of internal and
external stakeholders have been significantly improved since 1998, including
labour wage, ethic, and human resource management. Nike human resource
management best practice has delivered to their contract factories. The special
training and knowledge information update has regularly conducted. However,
the issue of principle-stewards still remains. The recommendation to cooperate
this issue include shared goal setup and trust to promote goal alignment,
reducing the threat of opportunistic behaviour, reward contract factories though
nonpecuniary mechanisms, and reducing the use of legal contracts to enforce
behaviours (Van Slyke 2007).

Conclusion

The case study of Nike Inc. has been discussed and analysed using two key
organisational theories; agency theory and stewardship theory. The issues of
complex network of Nike to manage their contract factories was raised the key
issue to discuss in this essay. Nike have been improving their sustainability and
innovation to be top of the role models. Nike had been captured from public as
inability to conduct the equality on labour wage, and less concern on
environmental and social impacts. The agency theory has applied to evaluate the
current situation of Nike in terms of principle-agent relations. However, the
stewardship theory focused in stewards (agents) involvement and their
alignment through their behaviour, psychology, and sociology. The
recommendations to improve the partnership-agent can be classified into three
domains; reduce risks of agents, maintain agents, and promote agents. With
highly concern in their contract factories of Nike, the problem of moral hazard
will be minimised. The sustainability and capability in network management will
be increased as its consequences.

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