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Table of Contents

Executive Summary....................................................................................................................................... 2 Analysis ......................................................................................................................................................... 5 Problem Statement ....................................................................................................................................... 6 Consumer and Marketing Issues............................................................................................................... 6 Internal Management ............................................................................................................................... 8 Host Country Concerns ........................................................................................................................... 11 Options ........................................................................................................................................................ 13 Do nothing .............................................................................................................................................. 13 Be Ethical and Social Responsible ........................................................................................................... 13 Greenfield Investment and Vertical Integration ..................................................................................... 14 Recommendation........................................................................................................................................ 15 Implementation and Control ...................................................................................................................... 16 Final Note .................................................................................................................................................... 18 Appendix: .................................................................................................................................................... 19 Exhibit 1: Nike Key Financials .................................................................................................................. 19 Exhibit 2: Nike Revenues and Gross Margins Chart 89-99...................................................................... 19 Exhibit 3: Nike Labor Costs Breakdown .................................................................................................. 20

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Executive Summary
Nike is one of the most recognizable name brands worldwide. This multinational enterprise (MNE) holds the top spot as the largest producer of athletic footwear in the world. Coupled with its apparel and sports equipment business units; Nike has become the champion in their industry but their achievements have come with a price tag and a high learning curve. Hitting the Wall: Nike and International Labor Practices, is a case illustrating how a corporation operating at a global level needs to deal with ethical issues relative to being socially responsible when faced with the lack of rules or guidelines commonly found in foreign lands. Keen focus on the aspects of good corporate citizenship must span the ever widening variety of stakeholders to effectively combat possible ethical injustices. In the 1980s and 1990s Nike was caught in the public opinion crosshairs concerning their methods of operation in South East Asia. This occurrence would ignite stakeholders at every level to impart pressure to change the way multinational enterprises would operate. At the center of this issue was the natural pull for MNEs to achieve operational cost reductions via global integration. This notion is not just unique to Nike. All MNEs must navigate the juxtaposition of drive for such operational cost reductions with the lure of eased employment regulations overseas. In 1964, both Phil Knight and University of Oregon track coach, Bill Bowerman founded Blue Ribbon Sports on a hand shake and a total investment of $1000.00. During the early stages of incorporation, Knight expanded his operational horizon with an idea that he had been studying during his stint at Stanford Business School. That notion was outsourcing and more clearly defined, off shoring. Knight would not be a manufacturer. The main functions of Blue Ribbon Sports would now be marketing and distribution. This concept mimicked what the U.S. appliance and electronics industries had already been doing. Earlier on, the electronics manufacturers in the U.S. determined that it was much cheaper to have their products built in Japan. With that inspiration, Knight moved all of his manufacturing to Japan. Blue Ribbon Sports contracted with then Onitsuka Corp. (Asics) to produce and distribute Tiger brand Page 2 of 20

shoes to the North American market. However, in 1971 contractual disputes forced Knight and Bowerman to start up their own shoe company. This was the beginning of Nike Corporation. With the 1972 Summer Olympics, Nike launched its first model with world class, long distance runner Steve Prefontaine. The brand would be widely accepted by runners and eventually reach critical mass with future marketing campaigns using the likes of John McEnroe, Michael Jordan and Tiger Woods. In order for Knights plan to flourish, he continued to locate outsourcing opportunities at the lowest cost. In Japan, Nike worked with shoe manufacturers, Nippon Rubber and Nihon-Koyo, but due to the dollar/Yen exchange rate, the tightening of labor markets and the oil crisis, costs increased forcing Nike to relocate its subcontractors. Exercising the path of least cost would land Nike in South Korea but once again history would repeat itself. The local economy would flourish and wages would follow in a commensurate fashion. Nike continued to venture into the Far East and exploit a cheaper workforce. The next stop was Thailand and Indonesia. Many of Nikes current subcontractors willing to keep their lucrative contracts would move their operations to these low cost countries. This is evidence that Nike was a strong customer/buyer in Porters Five Forces theory. Until this juncture, many of the employment issues had not yet surfaced and become visible for public scrutiny. Nike was persistent in utilizing subcontractors that paid slave wages, used underage employees and scheduled production in a manner which necessitated overtime whereby creating an inhospitable working environment. Visibility came by way of an ill-fated accident in 1997; Nguyen Thi Thu Phuong, was a factory worker for a Nike subcontractor who was hit by shrapnel from a nearby machine and killed instantaneously. This event placed Nike under a microscope relative to the treatment of employees by subcontractors. Nikes initial response was we dont manufacture the shoes, we only market the product. This guiding principle while true did not stand up against the power of public opinion and soon matters would get worse. The problems that continued to surface were slave wages or less than subsistence level wages, labor conditions and child labor. Nikes aforementioned position on accountability only proved to

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further damage their brand. The macro-environment would start to attack Nike as the U.S. and Asian governments tightened their grip. Add to this, Non Governmental Organizations were growing in strength, number and funding. This resulting international presence fostered new comers on college campuses that mobilized student campaigns in efforts to end contractual obligations by the university with Nike. Lucrative contracts were now jeopardized. Fueling the debacle was an activist by the name of Jeff Ballinger who interviewed disgruntled workers and reported the rampant labor conditions. Issues surfaced concerning the coercion by Nike on their subcontractors to force impractical production goals upon line employees. Even with legislation enacted, evidence of corruption was substantiated in a 1988 report where 12 out of 17,000 violations were ever prosecuted. Bribery took care of the rest. (Spar, 2002) Ballinger insisted on a tightly focused attack on Nike for this he called the one country-one company strategy. Ballinger would use Nikes branding power and swagger to create outrage against the mistreatment of Asian workers. These actions as well as articles in Indonesian newspapers concerning labor abuses by foreign multinationals sparked 112 strikes by laborers in 1991. Adding insult to injury, The comic strip Doonsbury and film director Michael Moore criticized Nikes labor practices. Here is an excerpt from Michael Moores 1997 film, The Big One. Moore: Have you been there? Knight: Ive never been to Indonesia Moore: Oh, you gotta go! Knight: I cant go, I must stay here with the rest of the ship Moore: Twelve year olds working in [Indonesian] factories? Thats O.K. with you? Knight: Theyre not 12-year-olds working in factoriesthe minimum age is 14. Moore: How about 14 then? Does that bother you?

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Knight: No.

(Moore, 1997)

It quickly became obvious that in order for Nike to prevail, they had to improvise their strategy for working with subcontractors. Emphasis would need to be placed on human resources, public relations, government relations, lean manufacturing with sub contractors, forecasting and reducing materials and SKUs. The joining of fair trade organizations and the full implementation of a code of conduct would need to be in place to repair Nikes brand.

Analysis
As more than 40,000 protestors lined the streets of Seattle, WA to halt the 1999 World Trade Organization meeting; the antiglobalization issues at hand were those of imperialistic corporations imposing their influence on developing nations that furthered the exploitation on workers. This exploitation could take the form of underage workers, less than sustenance wage rates, hazardous working environments, and inhospitable hours of operation. We can argue the point that the protestors also opposed the outsourcing of American jobs, however, this factor being an important one, is not the focus for this case. We have a very obvious problem when determining our direction for foreign direct investment. Yes, we need to fully realize the scope, time and place of entry but with respect to place, many MNEs look to developing countries having a comparative advantage relative to inexpensive labor. The opportunity for exploitation is ever-present. The culture and corrupt political atmosphere can lend itself to assist those MNEs that lack true moral fiber and an existence of a Code of Conduct. Today, we learn the many aspects of ethical behavior in class, mainly because of those that have abused policy before us. Sarbanes-Oxley was the result of scandals created by the likes of Enron, WorldCom and Global Crossing. The Nike case however, is an exercise in business ethics of a slightly different nature. There were not any Page 5 of 20

true illegalities as in the cases of Enron Corporation setting up dummy companies and artificially driving up the cost of energy for Californians via rerouting energy to create blackouts whereby creating demand. Nike, on the other hand, has negotiated the rather grey area in ethics concerning employment practices. Nike just might be the pioneer or best put poster-child for adopting ethical practices overseas in efforts to repair their brand as well as provide for better trade policy. The heightened attention that Nike received was largely due to both parts of its business model. Obviously, their exploitation of developing nations concerning employment practices were key problems but when coupled with the pompous manner in which Nike would bath celebrities with lucrative advertising contracts; it sent a message to the general public of stark disparity. Nike will ultimately have to increase the cost per pair of shoes as they embark on a program to resolve the disparity and bring their brand back to life.

Problem Statement
Consumer and Marketing Issues
Slowly Nike was losing traction during this entire episode. On one hand management was not readily accepting the responsibility of what was happening at their suppliers factories and on the other hand the labor activists were combing through the ground conditions and bringing out problematic facts to light. Both print and TV media started to single out these facts and slowly consumers were learning that the focus on Nike by the activists was not just a left oriented, liberal stance but was based on cold, hard reality. Reality about Nike, however ugly, started to hurt the very hearts of image conscious consumers.

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For years, Nike had run a remarkable advertisement onslaught on its consumers. Its sales went from 1.7 billion dollar of sales in year 1989 to 8.8 billion dollar of sales in year 1999 at an astronomical annual growth rate of 17.87% (Exhibit 1). The growth had been explosive because of Nikes clever advertisement strategy and celebrity endorsements. Shoe manufacturing is not that difficult. Any other company can do it easily and there has been many generic brands sold at innumerous discount stores around the world for years. But the generics had failed to captivate the consumers imagination the way Nike had done. Marketing was the area where Nike excelled and it was Nikes core competency from the start. The superior marketing strategy had given an aura of glory to Nike products and certain invincibility which competitors of Nike lacked. The tremendous yearly sales growth only strengthened Nikes belief in its invincibility. It was the basis of this strength that Nike initially dismissed labor condition reports with disdain and claimed they were not responsible for labor conditions as they did not make any shoes. The superior marketing had cultivated a strong image in the mindset of the consumer. The ever expanding use of the swoosh around its products and various celebrities who endorsed Nike products, had made consumers relate high performance, and doing right and great things with Nike. Consumers doled out large amounts of cash to buy Nike products in efforts to acquire the halo that Nikes marketing messages projected. When the consumers started to hear about how Nike produced its shoes, they were initially shocked. Slowly they realized what was happening and they started to join the ranks of other consumers who were shunning Nike products. Consumers started to relate Nike products with the Nike problems therefore they had no reason to buy Nike shoes. Nike, by not fixing the labor issues in its nip, was blunting its proverbial marketing edge. This would be catastrophic for Nike if it lost its only primary salability and the only differentiation it had in the market among other competitors. Slowly the tide started to turn. Consumers begin to react. Students around the universities started to organize boycott sessions and started demanding Universities to rescind athletic contracts with Nike. The celebrities who endorsed Nike products were starting to get heckled in public and were being asked inconvenient questions. Page 7 of 20

Nike products were mostly being endorsed by athletics. In sports there are ever emerging new stars and it was critical for Nike, a marketing heavy company to keep signing new future stars and to get these budding stars endorsements early and at cheaper contracts in their earlier years. If the negative labor buzz continued Nike will lose its ability to attract future stars and its marketing edge will become further blunt; also future extensions of existing celebrities contracts could be in danger. Those consumers, who considered doing the right thing and were attracted to the Nike brand, were slowly ditching Nike for brands that were deemed better in improving labor conditions. Reebok and other manufactures had declared labor rights policies and were actively taking steps to implement them. In these situations it was becoming natural for right minded consumers to leave Nike brand. It was also clear that Nike would be getting more consumers from developing countries where its factories were. The per capita incomes in many of these countries were in an upward trend. Thus Nike could not afford to have a negative image in these countries where future consumers had immense disdain for the company. Thus Nike was facing multiple challenges in its relationship with its customers. Its image and what was happening at its factories were becoming dichotomous and were diverging in different directions 180 degrees apart. Slowly the negative publicity was starting to gnaw at its profits. Decrease in profits if continued for long was threatening to break its ever expanding virtuous circle of increasing profits and marketing aided by celebrity endorsements. The cumulative revenue growth rate has slowed from 23.38% in last eight years to 17.76% for last 10 years. (Exhibit 1)

Internal Management
In general most companies are bound by ethical duties in pursuit of profits. For example a chemical company can be highly profitable if it chooses to locate its plant in an environmentally law lacking, developing country with total disregard to environmental cleanup of its byproducts. But if the

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company is embedded in deep ethical norms and moral sense, it will choose to spend some significant portion of profits to do cleanup and try to minimize its environmental foot print. If this company chooses not to do cleanup then the environment around its factory will continue to degrade, making people living around it sick and destroying natural resources. After some time its customers will learn about the damage and in most cases choose to avoid doing business with this company. Or the local government might become more conscious, could choose to take legal action, or close the operations for good. Hence being unethical might be profitable in short run but most likely reduce long term sustainability. Nike in reality is in a very high margin business. It has been successful in its ability to significantly lower the manufacturing cost and at same time increase its expenses in marketing and celebrity endorsement to the fullest. In the process it has been reaping rich monetary rewards for itself and its shareholders. By outsourcing, Nike has been able to successfully severe links with the most contentious force in any organization, the labor. With outsourcing the manufacturing of Nike shoes and apparel, labor suddenly became the subcontractors problems and issues to deal with. Nike in turn became very nimble and lean, allowing it to earn above normal, handsome profits. Nike had a policy of awarding its contracts to the cheapest bidder. Thus Nike was able to create its products cheaper then it could possibly do on its own via outsourcing (Exhibit 3). The Nike manufacturers were all based out of third world countries where labor and environmental laws were lax. Nike in a way washed its hands of all its responsibilities of the labor force producing its wonderful shoes in contractor factories. This is where the ethical problems ensue. On one hand Nike is under shareholders mandate as it is required to earn as much as it can but on the other the same mandate requires Nike to focus on its long term survivability and growth. By forcing its contractors to bid at cut throat prices Nike was able to complete its missions first part that is to earn handsome profits but at the same time chinks started to appear in growth in terms of falling sales and profits.

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The factory laborers were indirectly Nike employees as they exist for the sole purpose of making Nike shoes. All the employees at Nikes Beaverton, OR corporate headquarters were nicely paid and lived a very high standard of living compared to the factory workers. The situation looks even worse when the $150 price of Air Jordan was compared to the $1.50 per day that a typical factory worker earned. Thus there were vast differences between normal Nike employees and factory workers producing Nike wares. The Nike management, by effectively divorcing the labor from its internal constituency, basically ignored the woes of the workers. The Nike management did not care if its suppliers used child labor, made labor overworked at pittance or paid labor below sustenance pay (Exhibit 3). For Nike the relationship with its suppliers was all about logistics and keeping its value chain humming. Nike never expressed its expectations about labor policies and its working conditions with its suppliers. Since Nike management chose not to get bogged down by labor conditions their focus was only where suppliers were cutting corners to produce lower operational costs. That created a bad environment for labor and the labor activists got chance to bring these issues to the public and damage Nike. This is where Nike management failed to do the other part of its mandate; to take proper care of its long term survivability, sustenance and growth. Nike had shown that it was always seeking new, cheaper supply sources. It had moved it sources from Japan to Korea then to China, Indonesia. This seeking in our opinion was responsible to a certain extent in creating a bad working environment of shoe makers. The suppliers knowing that their relationships with Nike were not permanent had no desires to do capital investment in their factories in efforts to make the environment safer. Said capital investments would only make bids to Nike uncompetitive as well as become sunk costs if Nike were to switch suppliers. The way Nike operated was not conducive for any factory improvements to create safer and cleaner working environments.

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It seems to us that Nike management first of all did not have any will to monitor its labor or working conditions as well as compensation paid to factory workers. They did not have proper means to monitor it at the time when its major competitor Reebok was winning accolades for its efforts in monitoring and bettering labor at their suppliers. It is not clear why Nike was willing to give the upper hand to its rival whereby the chance for Reebok to outshine its image over Nike, and that too when the image mattered most in the athletic shoe and apparel business. When management realized that they needed to do something about the labor situation they hired their own agent to analyze and create a report relative to the labor injustices. The private agent broke norms in the process. For example they did used company appointed interpreters when they met with factory workers in Indonesia, a sure no in such audits. When the report came out saying all was well with the Nike labor force with few issues no one was ready to trust it. And it strengthened the notion that Nike really did not care about its labor force. All across the world more and more people started to come to believe that for Nike the labor was just like easily replaceable machines. Thus in 1992, when the issue of Nikes treatment of its labor was first raised and discussed by the activists, Nike, in its swoosh swagger, repeatedly responded with one statement We dont make shoes. Such notions were in discordance with the image swoosh was trying to create and was damaging the company.

Host Country Concerns


We have seen that Nike was seeking the lowest cost of production. Because of this strategy, Nike has outsourced operations to the countries where environmental and labor laws were lax. And even if the country had any such laws, they were ignored and not enforced. Policies were also disregarded by Nike suppliers. Many countries, for example, had minimum wage and anti-child labor laws but these were openly flaunted by Nikes suppliers. In many of the underdeveloped countries where Nike had a manufacturing base, child labor was not socially considered abhorrent. The child labor force could be seen in all walks of life in these countries and employed gainfully in many dangerous occupations; in Page 11 of 20

spite of anti-child labor laws. In these countries corruption was also quite rampant and law enforcers could be easily bribed to look other way when the laws were being flaunted. Basically, the suppliers were doing what would be the norm in their countries and they had no motivation and incentives to do otherwise. The strategy of pursuing low costs caused Nike to have relations with suppliers in dubious countries. This has created fertile ground for creating a bad labor environment and bad working conditions. Nike in one way was caught in its own trappings and was in situation where it had limited options to rectify the wrongs. Even if Nike were to pay more of the products to its suppliers so that the labor force could get decent wages; the chances were very high that the extra money would be pocketed by its contractors and would not find its way to the pockets of labor force. The bad labor practices employed by Nike suppliers were not very productive adding to inefficient throughput. Automation was ruled out as there was no will and benefits to do capital investments. Thus, the production process of shoes and apparel was very manual and required many hands to do things inefficiently. The contractors have to hire extra labor force and have to spread their allocated labor expenses among more labor heads. If the processes were efficient and labor was used efficiently, perhaps the savings could be allocated to pay decent wages. Such practices also require more quality checks and might cause further consumption in materials and labor. Nike, in the process of using country specific advantages had indirectly exploited labor in the developing countries. This was short sighted. Nike has exposed itself to future legal actions. The chances were very high that citizenry of the country might force governments of their countries to take legal actions and place punitive damages against Nike. Few of the Nike supplier countries were democratic and bad press could create a ground swell against foreign investment and could make Nikes supply sources uneconomical. Another aspect of bad labor conditions was that there was a high chance that militant labor leaders could take the lead, and create strikes and labor unrest; a situation not rosy for Nike.

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Options
Do nothing
This was Nikes response for long time. The company basically did not do much to mitigate the various issues arising in the entire labor affair. Some steps were taken but were not enough as the situation continued to deteriorate. It was becoming pertinent for Nike to urgently take some action and stop its gradual fall in reputation, image and sales. Time has come for Nike to apply their immense management acumen to the most difficult challenge the company was facing.

Be Ethical and Social Responsible


In our earlier discussions we observed that Nike was lacking in ethics and morals as far as its treatment to the workers making its products. One way to face the criticism various media personalities and consumers were making was to actually do something about it. There are multiple steps Nike can take to resolve this. First and foremost it was very urgent to make Nike supplier plants less toxic, clean and safe. This would require a major commitment from Nike and Nike had to develop long term relationships with its suppliers. We saw earlier due to the temporary nature of relationships and thin margins, suppliers were reluctant to do anything about working conditions and environment. Nike can make minority investments in its supplier companies and get on the board of directors of these companies to steer the supplier in right direction. Nike can make use of incentives. The incentive could be an award system where suppliers get monetary bonuses and contract extensions if they perform well on scorecards which keep track of cleanliness, safety, and non-toxicity in their facilities. Next step would be to say no to child labor. This would require major supplier education and regular audits of supplier facilities by Nike management. The contract clause should stipulate that any violation would rescind the contracts Nike had signed with its suppliers. Lastly Nike and suppliers need to work together to make sure their workers are making decent Page 13 of 20

wages to live relatively well above poverty line. This will require process improvements so more can be done with less labor which would ultimately result in Nike paying more for its products. Nike has to audit its suppliers regularly and sternly to make sure increased wages are properly being dispersed to the workers. Our calculations show that paying just one dollar extra per shoe will increase worker earnings by 30% but will decrease Nikes profits by 2.28% assuming wholesaler and retail margins are not changed (Exhibit 3). Once these three steps are implemented Nike needs to audit its suppliers to their fullest satisfaction. And then Nike can open its suppliers doors to NGO visits and media scrutiny. Nike has to create an annual publication to be sent out to media; and the report should scale and rank the company where it stands on ethics and corporate responsibility. Nike can also join various organizations and government committees which seek to improve workers conditions.

Greenfield Investment and Vertical Integration


Lastly, Nike has the option of entering into greenfield investments in developing countries or buy out its suppliers. Many of these suppliers were running subpar operations. Buying them would mean first deconstruct whatever these suppliers had and reconstruct afresh. Considering this fact, greenfield investment seems to be better bet. Nike might have to forego some of its profits to make this work. The Nike owned plants would be more controlled, efficient, clean, and safe. The workforce working in these plants will be more happy and productive. Many of the issues which arise of outside suppliers will be overcome. If Nike chooses this route it creates lot of other problems. Now management has to have competency running the plants which it does not have currently. There will be a learning curve running factories in foreign lands where the political, social and economic scenarios are entirely different than Nikes home country. In this instance, Nike is at risk by tying up its capital in developing and volatile

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foreign countries whereby losing the tremendous flexibility they currently enjoy by their outsourcing arrangements.

Recommendation

Our recommendation to Nike is Be a Socially and Ethically responsible company. This case illustrates how a corporation operating at a global level needs to deal with ethical issues relative to being socially responsible when faced with the lack of rules or guidelines commonly found in host nations. Many of the ethical issues in international business are rooted in the variations among nations in their political systems, law, economic development, and culture. In the international business setting, the most common ethical issues involve employment practices, human rights, environmental regulations, corruption and the moral obligation of multinational corporations. Most of the issues raised in the case are a result a lack of ethics established at Nike. The following examples presented in the case will further solidify our theory. In 1997, a factory worker for a Nike subcontractor was hit by shrapnel from a nearby machine and killed instantaneously because of poor safety standards maintained at the factories. In 1993 a CBS report revealed that Nikes subcontractors used child labor and made them work with toxic materials six days a week in poor working conditions for only 20 cents an hour. The report also stated that a living wage in Vietnam was at least $3 a day, an income that could not be achieved at the subcontractor without working substantial overtime. These examples illustrate how Nikes is exploiting weaker laws of host nations. A disgruntled Nike employee leak of an internal Ernest & Young report reveled serious health and safety issues in a factory outside of Ho Chi Minh City. According to the report, a majority of workers suffered from a respiratory ailment caused by poor ventilation and exposure to toxic chemicals. The plant

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did not have proper safety equipment and training, and workers were forced to work 15 more hours than allowed by law. Nikes response to these allegations was reactive at best; their initial defense was We dont make shoes. Nike insisted that labor conditions in its contractors factories were not its responsibility and even if labor violations did exist in Nikes contracting factories the management did not want to hear them. Nikes company line on the issue was clear and stubborn, without an in-house manufacturing facility, the company simply could not be held responsible for the actions of independent contractors. This kind of response only made matters worse for Nike. Nike started to suffer serious damage to its image and Americans were becoming sick of the swoosh. Competitors like Adidas three-stripe logo fast replaced Nikes swoosh among the teen trendsetter crowed. We believe that it is time for Nike to come clean and adopt a comprehensive, socially and ethically responsible plan to overcome these image issues. Nikes management should establish a code of conduct for its subcontractors and institute annual monitoring by independent auditors of all subcontractors.

Implementation and Control

Nikes CEO Phil Knight can implement ethical and social responsibility by focusing on hiring and promoting people who would not engage in unethical and illegal behavior, build an organizational culture that places a high value on ethical behavior, make sure that leaders within the business not only articulate the rhetoric of ethical behavior, but also act in a manner that is consistent with that rhetoric, develop a decision making process that requires employees to consider the ethical dimension of business decisions and develop moral courage.

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By reading this case one can conclude that Nike does not accentuate ethical behavior. To foster ethical behavior, Nike needs to build an organizational culture that values ethical behavior. Nike must explicitly articulate values that emphasize ethical behavior. Many companies now do this by drafting a code of ethics, which is a formal statement of the ethical priorities a business adheres to. Building organizational culture that places a high value on ethical behavior requires an incentive and reward system, including promotions that reward people who engage in ethical behavior as well as sanction those who do not. Nike should establish a code of conduct for its subcontractors on ethical behavior. When establishing code of conduct and policies, Nike should make sure they would follow home country laws when host country laws are inferior or inadequate. Before awarding the contract they should conduct thorough background checks to make sure subcontractors have clean track records regarding business ethics. Once the contract is awarded, Nike should place expatriate employees on-site to make certain that the subcontractor follows its guide lines to pay fair wages and provide safe and hazard free working environments. Also Nike has to audit its subcontractors regularly and sternly to make sure increased wages arent being misappropriated. In addition to auditing subcontractors internally, it should allow independent auditors, NGOs and media visits to subcontractor factories whereby creating transparency. Nike has to create an annual publication to be sent out to media; and the report should scale and rank the company where it stands on ethics and corporate responsibility. Nike can also join various organizations and government committees which seek to improve workers conditions. It is important that employees of Nike need significant moral courage. Moral courage enables managers to walk away from a decision that is profitable, but unethical. Moral courage gives an employee the strength to say no to a supervisor who instructs him to pursue actions that are unethical. Moral

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courage gives Nikes employees the integrity to go public to the media and blow the whistle on persistent unethical behavior in a company.

Final Note

Much of the forced overtime is a result of ineffective forecasting on the part of Nike. The impact is realized at the lowest level; by the line worker. Inhospitable working conditions can be alleviated by Nike via a focus on the accuracy of shoe sales forecasts. The implementation of transactional Six Sigma by Nike can assist in this process.

Lastly, Nike should invite its subcontractors to adopt TQM techniques such as Six Sigma and Lean Management. The net result will raise the efficiency levels of the subcontractor and therefore reduce costs which can be funneled back to the workforce in the form of higher wage rates (ie. Operational expenses can be further fed by a decrease to inventories and an increase to throughput sales).

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Appendix:
Exhibit 1: Nike Key Financials

Exhibit 2: Nike Revenues and Gross Margins Chart 89-99

Nike Revenues and Gross Margins 89-99


$12.00 $10.00 $$s (Billions) $8.00 $6.00 $4.00 $2.00 $0.00 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Revenues Gross Margin

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Exhibit 3: Nike Labor Costs Breakdown

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