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ALLAMA IQBAL OPEN UNIVERSTY

STUDENT ID : AM552730

CLASS : MCOM (II)

SUBJECT : MARKETING MGT

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A Report on

MARKETING CHANNEL MANAGEMEN CASE

OF

NESTLE

(Year 2012)

Subject: Marketing Management

ALLAMA IQBAL OPEN UNIVERSTY ISLAMABAD

Project on

Marketing Channel Management

(8511)

Prepared & Presented by:

Submitted by : Mabroor AhmedRoll Number : AM552730

Submitted to : Mr Nouman SattarDate : September 24, 2012

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ACKNOWLEDGMENT

All acclamation to Allah who has empowered and enabled us to accomplish the task

successfully. First of all we would like to thank our Allah Almighty who really helps us in

every problem during the project. We would like to express our sincere and humble

gratitude to Almighty whos Blessings, help and guidance has been a real source of all our

achievements in our life.

We would like to admit that we completed this project due to parents who pray for our

success.

We also wish to express our appreciation to our supervisor Mr Nouman Sattar who helps us

and introduce us to new dimensions of knowledge.

Last but not the least our team efforts, support, cooperation and encouragement showed by

each member in the group with each other.

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DEDICATION

Our PROJECT is dedicated to our beloved Parents, teachers, brothers, sisters and all of our-

selves.

ON

MANAGING CHANNEL CONFLICTS

OFNESTL

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INTRODUCTION

Nestl was founded in 1866 by Henri Nestl and is today the world'sbiggest food and beverage company. Sales at the end of 2005 wereCHF 91 bn, with a net profit of CHF 8 bn. Nestl employ around250,000 people from more than 70 countries and have factories oroperations in almost every country in the world.

The history of Nestl began in Switzerland in 1867 when HenriNestl, the pharmacist, launched his product Farine Lacte Nestl,a nutritious gruel for children. Henri used his surname, whichmeans little nest, in both the company name and the logotype. Thenest, which symbolizes security, family and nourishment, still playsa central role in Nestls profile.

Since it began over 130 years ago, Nestls success with productinnovations and business acquisitions has turned it into the largestFood Company in the world. As the years have passed, the Nestlfamily has grown to include chocolates, soups, coffee, cereals,frozen products, yoghurts, mineral water and other food products.Beginning in the 70s, Nestl has continued to expand its product

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portfolio to include pet foods, pharmaceutical products andcosmetics too.

Today, Nestl markets a great number of products, all with onething in common: the high quality for which Nestl has becomerenowned throughout the world The Company's strategy is guidedby several fundamental principles. Nestl's existing products growthrough innovation and renovation while maintaining a balance ingeographic activities and product lines. Long-term potential is neversacrificed for short term performance. The Company's priority is tobring the best and most relevant products to people, wherever theyare, whatever their needs, throughout their lives.

Taste of Nestl in each of the countries where Nestl sell products.Nestl is based on the principle of decentralization, which meanseach country is responsible for the efficient running of its business- including the recruitment of its staff.

That's not to say that every operating company can do as it wishes.Headquarters in Vevey sets the overall strategy and ensures that itis carried out. It's an approach that is best summed up as:

'centralize what you must, decentralize what you can'. Nestl is acompany which is present in all over the world but it has differenceand unique motto to deal in all over the world. Nestl believes thatthey should think about their organizations globally but they dealwith people by interacting with them locally.

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THINKING GLOBALLY ACTING LOCALLY

INTRODUCTION TO NESTL INDIA

Nestl India is a subsidiary of Nestl S.A. of Switzerland. With sevenfactories and a large number of co-packers, Nestl India is a vibrantCompany that provides consumers in India with products of globalstandards and is committed to long-term sustainable growth andshareholder satisfaction.

The Company insists on honesty, integrity and fairness in allaspects of its business and expects the same in its relationships.This has earned it the trust and respect of every strata of societythat it comes in contact with and is acknowledged amongst India's'Most Respected Companies' and amongst the 'Top Wealth Creatorsof India'.

AN OVERVIEW

Nestls relationship with India dates back to 1912, when it begantrading as The Nestl Anglo-Swiss Condensed Milk Company(Export) Limited, importing and selling finished products in theIndian market.

After Indias independence in 1947, the economic policies of theIndian Government emphasized the need for local production.Nestl responded to Indias aspirations by forming a company inIndia and set up its first factory in 1961 at Moga, Punjab, where theGovernment wanted Nestl to develop the milk economy. Progressin Moga required the introduction of Nestls Agricultural Services

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to educate advice and help the farmer in a variety of aspects. Fromincreasing the milk yield of their cows through improved dairyfarming methods, to irrigation, scientific crop managementpractices and helping with the procurement of bank loans. Nestl

set up milk collection centers that would not only ensure promptcollection and pay fair prices, but also instill amongst thecommunity, a confidence in the dairy business. Progress involvedthe creation of prosperity on an on-going and sustainable basis thathas resulted in not just the transformation of Moga into aprosperous and vibrant milk district today, but a thriving hub ofindustrial activity, as well. For more on Nestl AgriculturalServices,

Nestl has been a partner in India's growth for over nine decadesnow and has built a very special relationship of trust andcommitment with the people of India. The Company's activities inIndia have facilitated direct and indirect employment and provideslivelihood to about one million people including farmers, suppliersof packaging materials, services and other goods.

The Company continuously focuses its efforts to better understandthe changing lifestyles of India and anticipate consumer needs inorder to provide Taste, Nutrition, Health and Wellness through its

product offerings. The culture of innovation and renovation withinthe Company and access to the Nestl Group's proprietarytechnology/Brands expertise and the extensive centralized Researchand Development facilities gives it a distinct advantage in theseefforts. It helps the Company to create value that can be sustainedover the long term by offering consumers a wide variety of highquality, safe food products at affordable prices.

Nestl India manufactures products of truly international qualityunder internationally famous brand names such as NESCAF,MAGGI, MILKYBAR, MILO, KIT KAT, BAR-ONE, MILKMAID andNESTEA and in recent years the Company has also introducedproducts of daily consumption and use such as NESTL Milk,NESTL SLIM Milk, NESTL Fresh 'n' Natural Dahi and NESTLJeera Raita.

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Nestl India is a responsible organization and facilitates initiativesthat help to improve the quality of life in the communities where itoperates.

PRESENCE IN

After nearly a century-old association with the country, today,Nestl India has presence across India with 7 manufacturingfacilities and 4 branch offices spread across the region.

Nestl Indias first production facility, set up in 1961 at Moga(Punjab), was followed soon after by its second plant, set up atCholadi (Tamil Nadu), in 1967. Consequently, Nestl India set upfactories in Nanjangud (Karnataka), in 1989, and Samalkha(Haryana), in 1993. This was succeeded by the commissioning oftwo more factories - at Ponda and Bicholim, Goa, in 1995 and 1997respectively. The seventh factory was set up at Pantnagar,

Uttarakhand, in 2006.

The 4 branch offices in the country help facilitate the sales andmarketing of its products. They are in Delhi, Mumbai, Chennai andKolkata. The Nestl India head office is located in Gurgaon,Haryana.

HEAD OFFICE

Nestl India Limited

Nestl House

Jacaranda Marg,

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'M' Block, DLF City, Phase II,

Gurgaon - 122002 (Haryana).

Tel.: 01242389400.

REGISTERED OFFICE

Nestl India Limited

M-5A, Connaught Circus,

New Delhi110001.

Tel.: 011- 41514444.

EVOLUTION OF NESTL

1867 Henri Nestl founded the company in Vevey, Switzerland.

1898 Nestl purchases its first factory outside of Switzerland -Viking Milk factory in Norway.

1905 Nestl merges with Anglo-Swiss Condensed Milk Company.

1929 Nestl merges with Peter-Cailler-Kohler Chocolates SuissesS.A.

1938 Nestl launches Nescaf - the worlds first instant coffee.

1947 Nestl merges with Alimentana S.A. with the brand Maggi.

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1962 Nestl purchases Findus.

1974 Nestl becomes a significant shareholder in the CosmeticsCompany LOral.

1977 Nestl purchases Alcon, manufacturer of eye care productsand kits.

1985 Nestl purchases the Food Company Carnation.

1988 Nestl purchases the confectionary company RowntreeMackintosh and the pasta company Buitoni-Perugina.

1992 Nestl purchases the mineral water Company Perrier.

1998 Nestl purchases Spillers pet foods business.

2000 Nestl sells the Findus brand in all countries except forSwitzerland.

2001 Nestl merges with Ralston Purina, the premier pet food

company in North America, and with unique expertise in the drydog food area.

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VISION OF NESTL

Nestl's vision of making good food central to enjoying a good

healthy life for consumers everywhere. This implies gaining a deeperunderstanding in many areas of nutrition and food research andtransforming the scientific advances into applications for thecompany.

Having a broad vision the company is doing its best for theirconsumers to show the great sense of responsibility.

Nestls aim is to meet the various needs of the consumer every dayby marketing and selling food of a consistently high quality.

The confidences that consumers have in our brands is a result ofour companys many years of knowledge in marketing, research anddevelopment, as well as continuity - consumers relate to this andfeel they can trust our products.

HIGH QUALITY AND COLLABORATION

Our objectives are to deliver the very best quality in everything wedo, from primary produce, choice of suppliers and transport, torecipes and packaging materials. Our operations and collaboration

in the Nordic countries gives us greater opportunities to be efficientand strategic and to function well as an organization, both when itcomes to the distribution chain and to concentrating on jointproduct launches and campaigns.

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FOCUS ON E-BUSINESS & WEBSITES

Increased investments in the sphere of e-business give us swifter

business and direct contact with trade. Our website is a forum forconsumers, students, future employees and the media. We hopethat through a sincere approach and by conducting dialogues, wewill be able to improve, change and satisfy the demands and wishesof the people of today

MAIN BRANDS OF NESTL ARE AS UNDER:

CoffeeNescaf, Tasters Choice, Ricor, Ricoffy, Nespresso, Bonka,Zogas, Loumidis.

Water Nestl Pure Life, Nestl Aquarel, Perrier, Vittel, Contrex,S.Pellegrino, Acqua Panna, Levissima, Arrowhead, Poland Spring,Deer Park, Ozarka, Hpar, Ice Mountain, Zephyrhills.

Other beveragesNestea, Nesquik, Nescau, Milo, Carnation, Libbys,Caro, Nestomalt, Nestl.

Shelf stable Nestl, Nido, Nespray, Ninho, Carnation, Milkmaid, LaLechera, Moa, Klim, Gloria, Svelty, Molico, Nestl Omega Plus,Bear Brand, Coffee-Mate, milk pak, yougart.

Chilled Nestl, Sveltesse, La Laitire, La Lechera, Ski, Yoco, Svelty,Molico, LC1, Chiquitin.

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Ice cream Nestl, Antica Gelateria del Corso, Dreyer's/Edy's,Drumstick/Extrme, Maxibon/Tandem, Mega, Mvenpick, SinParar/Sem Parar/Non Stop.

Infant nutrition Nestl, Nan, Lactogen, Beba, Nestogen, Cerelac,Neslac, Nestum, Guigoz, Good Start.

Performance nutrition PowerBar, Pria, Musashi.

HealthCare nutrition Nutren, Clinutren, Peptamen, Modulen.

Bouillons, soups, seasonings, pasta, sauces, Maggi, Buitoni,Thomy, Winiary, Torchin.

Frozen foods Stouffers, Lean Cuisine, Hot Pockets, Buitoni, andMaggi.

Refrigerated products Nestl, Buitoni, Herta, and Toll House.

Chocolate and biscuits Nestl, Crunch, Cailler, Galak/Milkybar,Kit Kat, Smarties, Butterfinger, Aero, Polo.

Cosmetics Biotherm, Body Shop, Cosmence, Garnier, HelenaRubenstein, Innov, La Roche-Posay, Lancme, L'Oreal, Matrix,Maybe line, Metamorphosis, Plenitude, Red ken.

Pet food Arthur's, Bakers, BETA, Bonio, Felix, Friskies Go-Cat, Go-dog, Pro Plan, Purina, Spiller's Winalot.

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DISTRIBUTION CHANNEL

Distribution plays important role in success and failure of anyorganization. The organization may fail, if its distribution networksare not efficient and unable to provide the necessary items atrequired place and at reasonable time.

Distribution system of Nestl is one of major source of competitiveedge over its existing rivals. Nestl has its own distributionnetworks equipped with all necessary transportation facilities. Theytransport their products at major regional sales offices, which aresituated at different cities of India. These sales offices (distributioncenters) have their own vans with sales people who sell andtransport goods to the small retailers.

CARRIAGE & FORWARDER AGENT

DISTRIBUTOR SUPER - STOCKIST

WHOLESALER RETAILER RE - DISTRIBUTER

RETAILER

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In general Nestl follows the above sequence for distribution of itsproducts. In India this strategy is working very effectively andefficiently. By the above diagram, we can understand that theproducts are sent to the C&F Agents of the company from its

Manufacturing Unit. Then at later stage its been sent to Distributorand Super Stockist. Here, Distributor is the responsible person tomanage the availability of products in his area, whereas SuperStockist supplies the goods to Re-Distributor who is responsible tomanage the availability of outside the region of Distributor. Thenthe Distributor and Re-Distributor supply the products toWholesaler and Retail in their respective region or area.

There will be a single C&F Agent for every state who supplies thegoods to the Distributor. Now, distributor will be appointed by thecompany for every urban city. That distributor will be havingresponsibility to maintain the proper flow of goods in his region.Whereas on the other hand there will be a Super Stockist in thesame city who will supply the products to the Re-Distributor whowill be there at the near by places of that city.

For Example: There will be only 1 C&F Agent in Uttar Pradesh. Hewill supply the goods to the Distributor of Noida / Delhi NCR. Andat the same time C&F Agent will also send goods to the SuperStockist. But Super Stockist will no supply any goods in Noida /Delhi NCR. Now the Rural areas near Noida / Delhi NCR will bemanaged by Re-Distributor. Re-Distributor will receive goods fromSuper Stockist. A Super Stockist will supply the goods to many Re-distributors. Then at last, distributor and re-distributor will supplygoods to wholesaler and retailer in their respective areas.

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CHANNEL CONFLICT

Channel conflict occurs when manufacturers (brands)disinter mediate their channel partners, such as distributors,retailers, dealers, and sales representatives, by selling theirproducts direct to consumers through general marketingmethods.

Channel conflict can also occur when there has been overproduction. This results in a surplus of products in the marketplace.

The products, changes in trends, insolvency of wholesalersand retailers and the distribution of damages goods also affectchannel conflict.

To avoid a channel conflict in a click-and-mortar, it is of greatimportance that both channels are fully integrated from allpoints of view.

Herewith, possible confusion with customers is excluded andan extra channel can create business advantages.

Agents / Brokers.

Channel partners that match marketers with wholesalersor in organization market with customers.

They are very important for international marketing withcustomers.

Wholesalers. A wholesaler is someone who primary sells to others

retailers.

Also may retail own. Typically buy in bulk.

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Very important in rural India.

Retailer. The most visible face of the distribution network. India has the largest number of retailers in the world.

TYPES OF CHANNEL CONFLICT

Vertical conflict: arises when there is a clash of interestsbetween member at 2 different level (like wholesaler andretailer)

Horizontal conflict : Is between member at the same level , exRetailer A vs. Retailer B

For Example: McDonalds franchisees for instance; if care isnot taken, the grumbles might be roar.

Attitudinal causes of conflict Disagreement about channel roles. Future expectations Present perceptions Lack of expectations

Structural Causes of conflict Divergence in goals Drives for autonomy Fights over scarce resources

Felt conflict Related to frustration, disappointments, negative

feelings

Agree to disagree Manifest conflict

Expressed behavior

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TWO MECHANISMS FOR CONFLICT MANAGEMENT

CONFLICTS FOUND DURING RESEARCH

LOWER MARGIN IN THE INDUSTRY

PERFETTI CADBURY NESTL LOTTE WRIGLEYS COLGATERECKITT

BENCKISER

SUPERSTOCKIST 2.5 2

2 2.5 2 2 2

SUBSTOCKIST 4 4 3.8 6 5 5.6 5

TOTAL 6.5 6 5.8 8.5 7 7.6 7

PROBLEM: From the above chart, we can see that Nestl gives thelowest margin to its distributors in the industry.

INSTTUTIONAL MECHANISMINTERPERSONAL

MECHANISM AND THIRD

PARTY MECHANISM

1.Joint membership ofassociation

2.Executives exchange3.Cooption4.Distributor councils

1.Mediation

2.Arbitration

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Hence, the margins to the retailers are also reduced. If we considerthe motivation of the retailers to keep Nestls products, thethroughput or off take of Nestls products is very high and mostretailers would be keen to maintain their baskets of goods, the low

margins are a dampening factor, as mentioned by a few retailers inour interactions.

RECOMMENDATION: Considering the low motivation of the Nestlretailers, due to lower margins on products sold by them, companyshould try to compensate them or give them an opportunity toincrease their profits by extending better percentage incentiveschemes on purchase in bulk. Instead of harming the profitability ofthe company by extending greater margins, these schemes wouldlead to high volume purchase by retailer, thereby increasing theprofitability of the company.

Issues in Implementation: The problem which could emerge whileextending greater percentage schemes are that once the retailers getused to higher schemes on a particular product, it becomes verydifficult for the company to change/ reduce the scheme on theproduct. Apart from that, profitability of the company is definitelyaffected if the scheme is extended in an unplanned manner.

Tackling Implementation Issues: These schemes should not beextended on the products haphazardly. In order to implement theschemes, company needs to identify on which products is thescheme suitable. The products which already have a very good pulleffect like Maggi need not be given higher schemes. The productswhich majorly require pull effect like Everyday tetra pack milk,coffee etc should be a part of such incentive schemes. In order tohave better control over the channel and prevent retailersresistance while changing/reducing the scheme, company shoulddevice a strategy of rotation of scheme among the various productsin portfolio, e.g. for Jan-Mar Company could go for higher schemeson Everyday tetra pack milk, for April- Jul it should reduce the

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scheme on Everyday and increase the scheme on Coffee packs. Thecompany can further decide upon which products it wants to pushfor a particular time period.

PROBLEM: We realized that the displays bought by Nestl were notmaintained properly and they scored low on hygiene and adherenceto planogram. As the merchandisers performance is notmeasurable, it is not possible to make his work accountable whichresults in slack of work among some merchandisers. Hence, themain challenge lies in the fact that the merchandisers productivityand effectively is currently not measured hence his performancecannot be measured unlike Distributor Salesman whose turnover isan important input for performance evaluation.

RECOMMENDATION: Every Distributor will have somemerchandisers who are responsible for putting up the displays andmaintaining them, week-in and week-out. Merchandiser beat plancovers around 40-50 outlets per week and generally, there are 1-3merchandisers per distribution point. From our market visit, weobserved that the slack of work by merchandisers cannot be gaugedand there is lack of motivation among the merchandisers to excel intheir work. The recommendation for this is to have incentives formerchandisers based on their work. The merchandisersproductivity and efficiency can be measured by the Sales Officers bymore frequent visits and taking feedback from the distributorsalesman. Incentives of Rs. 400-500 would motivate themerchandisers and put proper effort into his job.

Issues in Implementation: The performance evaluation ofmerchandisers is very subjective and incentivizing on the basis ofvisits and feedback of Distributor Salesman may lead to discontentfor certain merchandisers and probable conflict with the DistributorSalesman.

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Tackling Implementation Issues: To ensure that the incentivesstructure does not cause any discontent among merchandisers, itshould be the Sales Officers responsibility that he keeps thefeedback from Distributor Salesmen as private so that there is no

conflict of interest and be in constant communication with themerchandisers about their market beats and performance.

Visit Details: We visited retail outlets in Sector 18 & 29 inNoida and Krishna Nagar in Delhi; interacted with theretailers. We identified the problems which the retailers arefacing and possible suggestions for the company to resolvethese issues.

We also accompanied a salesman and interacted with himto discuss the working and issues with Nestl distributionchannel.

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NIKE - CASE STUDY ON CHANNEL CONFLICT

As 1999 drew to a close, Mary Kate Buckley, general manager ofnike.com, found herself and her division at a crossroads. Over the

last twelve months, nike.com had rolled out an ambitious e-commerce initiative, signed an exclusive deal with Fogdog sportsthat allowed NIKE products to be sold by a pure internet companyfor the first time, and had grown from twelve to 150 employees. Butnike.com faced countless critical decisions in the coming months.Specifically, nike.com needed to plan not only its own direct-to-consumer sales strategy, but also its policies and rules for on-linesales of NIKE products by other vendors.

COMPANY HISTORY, STRATEGY AND STRUCTUREBRS, the company that would evolve into NIKE, was founded in1964 by Phil Knight. The purpose of the company was to makehigh-performance athletic shoes for the U.S. market. Knight, aStanford MBA and middle distance runner at the University ofOregon, recognized an unmet need for quality athletic footwear thatcould be filled inexpensively with well-made Japanese imports.Knight started selling these imported shoes directly to runners attrack meets in his spare time and NIKE was born.

Over the following 35 years, NIKE grew from a part-time job for PhilKnight into the worlds dominant athletic footwear and apparelcompany by following a consistent and logical strategy: to capitalizeon the importance of sports in peoples lives and to be identifiedwith competition and victory in consumers' minds (the company isnamed for the Greek goddess of Victory).

Located on a bucolic campus in Beaverton, Oregon, NIKE stood out

as atypical for a large apparel company. The NIKE culture wasfamous for its internal collegiality and outward competitiveness, atribute to founder Phil Knight's influence on the firm. Knight hadheld close control of the company since its founding and had ruledwith a shifting mix of closely allied senior managers.

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The company's brand management efforts focused on endorsing thebest possible athletes and making the famous NIKE swooshubiquitous. The roster of athletes who wore and promoted NIKEproducts read like a multi-sport hall of fame, including mega-stars

such as Michael Jordan, Tiger Woods, Mia Hamm, and Ken Griffey,Jr.

NIKE went to tremendous lengths to promote its brand and imageacross the world. The company typically spent over 11% of revenueson advertising, sports marketing and promotional spending, ornearly one billion dollars in fiscal year 1999. (Exhibit 1) NIKEsadvertising has included some controversial campaigns thatstressed winning above all else. Other campaigns were downrightwhimsical, involving basketball encounters between humans andloveable cartoon creatures.

NIKE was a highly centralized and extremely focused company.Management concentrated on a few core corporate functions, suchas brand building and supply chain management. In addition, adedicated sales force sold NIKE products to retailers or, in a limitednumber of countries, to distributors.

NIKE VALUE CHAIN

Manufacturers / Suppliers

Consistent with its original strategy, NIKE outsourced virtually allof its footwear manufacturing to low-cost Asian or South Americanmanufacturers. By 1999, the primary locations for NIKE productionwere Indonesia, Vietnam, Korea and China. Managing its globalsupply chain was a core strategic advantage for NIKE and all its

operations were geared towards ensuring smooth integration withcontract manufacturing.

The company worked with hundreds of manufacturing partners inorder to develop long-term, trusting relationships. Manufacturingpartners did not necessarily provide the cheapest production, butfor the most part, they delivered consistent, timely shipments of

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goods that met NIKEs high quality standards. The partners werewilling to invest heavily in capabilities to manufacture new designsor features, knowing that production levels would be high enough tooffset the investment.

NIKE generated all its own new product ideas and managed thedesign process in-house. Once a design was perfected, amanufacturer would begin the eight-month product cycle process ofdeveloping volume production capabilities in all the relevant sizes.Once production was fully on-line, NIKE could expect orders to befulfilled within 90 days, plus an additional 30 days for shipping bysea freight.

Product Lifecycle

Getting a new athletic shoe model on a store shelf could take 15 to18 months, from initial planning to final product distribution.Volumes were determined far before shoes arrived at consumeroutlets, requiring careful forecasting from NIKE and its merchants.A typical new NIKE shoe had a market life of 3 to 6 months fromintroduction to depletion of inventories. Because the product lifewas so much shorter than the production cycle, it was not possibleto adjust production runs to meet unexpected levels of consumer

demand. As a result, NIKE did not try to match supply of any givenshoe model with demand, preferring instead to set conservativeproduction targets and then begin designing the next generationmodel.

A typical NIKE factory produced between 2,000 and 3,000 pairs ofshoes in a day, implying a production run of about three months fora line that would sell 200,000 shoes. It was difficult for NIKE tomake money on smaller production runs, although the company did

produce some specialty shoes at considerably lower volumes.

Retail Sales Channel

NIKE utilized a large in-house sales force to sell its productsthrough a number of different types of stores multi-sport generalathletic department stores, specialty athletic department store

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retailers and general-purpose shoe stores. Despite the company'sorigins selling shoes straight to\ track runners from the back ofPhil Knight's car, NIKE had not been very interested in direct toconsumer sales. The company did not have a meaningful catalog or

mail-order business and had opened only a handful of its ownstores, called NIKE Towns. Even these NIKE-owned stores wereseen more as a marketing and brand-building effort than ameaningful source of sales.

The retail market for athletic footwear and apparel was extremelyfragmented. (Exhibits 2, 3 and 4) The top ten sporting goodsretailers represented a mere 14% of total U.S. sales. Because theseretailers were so small, they had been slow to implementsophisticated technology to track purchases and inventory, leadingto frequent stock outs and misallocations of inventories. NIKE hadsuffered in the past from imperfect information concerning retailers'inventory levels and was hopeful that better methods of inventorymonitoring would be found.

NIKEs 40% market share in U.S. athletic footwear gave it additionalinfluence with the merchants who carried their products. Thecompany encouraged advance planning from its retail partners nearly 90% of the orders it received from retailers were for future

deliveries nine months out. As a result, NIKE was able to planmanufacturing and distribution far in advance to meet itsguaranteed future sales. NIKE was also able to negotiate favorablecontract terms with its retailers, including display characteristics,inventory levels, and other details that affected the consumerexperience.

The company distributed most of its own products from its factoriesto retail stores or retailer distribution centers. The distribution

process was extremely complex; a retailers monthly order of300,000 pairs of shoes could involve over 50 different models beingshipped to 100 different locations. In the late 90s, NIKE investedover $1 billion in several large regional distribution centers toreplace its numerous smaller centers. NIKE also started providingdiscounts to retailers who managed their own distribution rightfrom the NIKE Factory, thus avoiding the need to go through a NIKE

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distribution center at all. NIKE tried to keep inventories to a bareminimum and managed over 5 inventory turns a year.

Direct Sales Channels

In 1999, NIKE owned and operated 13 NIKE Town superstores;typically located in extremely high-traffic, upscale shoppingneighborhoods. The first NIKE Town store was opened in Portlandin 1990 and was described by its designer as a cross between theSmithsonian, Disney World, and Ralph Lauren. While a broad rangeof NIKE footwear and apparel was sold (at full retail price), thelayout of the store and the merchandise selection made it as mucha showcase of NIKE products as a retail store.

The Portland store was quickly followed by an even more ambitiousproject in downtown Chicago. The Chicago store, a 70,000 squarefoot operation located in some of the most expensive real estate intown, quickly became the citys largest tourist attraction as 7,500visitors a day flooded in to see the two-story mural of MichaelJordan and try NIKE shoes out on the miniature basketball court.

The NIKE Town stores were not run to be independently profitable,or even to be major selling channels for NIKE products. Instead,

they were a showcase for NIKEs newest or most innovative productlines, an opportunity to strengthen ties with consumers, and anextraordinary brand advertising opportunity. The stores also carriedhard-to-find products or specialty items not available from typicalretailers. Another source of sales at NIKE Towns was souveniritems, such as the Michael Jordan paraphernalia sold at theChicago store. Initially, retailers were wary of the concept, fearingthey would lose sales to NIKE Town stores, but their fears wereeventually allayed as the companys intentions became clearer.

There was a sense within NIKE that the NIKE Town stores had notlived up to their full retail potential due to efforts to appeaseretailers concerns about competing directly with NIKE.

In addition to the NIKE Town stores, NIKE operated 53 outletlocations to liquidate overstocked or outdated inventory. Thischannel provided the company with a convenient means of

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disposing excess inventory without giving up too much control ofthe brand. Prices and quality were both controlled directly tominimize impact on the core brand, rather than relying on otherliquidation channels.

THE SPORTING GOODS E-COMMERCE LANDSCAPE

The on-line market for sporting goods in 1999 was chaotic. Avariety of types of competitors were eager to join the internet frenzy traditional sporting goods retailers, manufacturers focused onselling direct to consumers, and new start-up companies formed totake advantage of the new opportunities on the internet.Complicating matters was the emergence of Global Sports, Inc.(GSI), an internet start-up with an innovative outsourcing-basedbusiness model.

Traditional Retailers

Virtually every significant sporting goods retailer had establishedsome type of web presence by late 1999. Several retailers, such asFoot Locker and Copeland's Sports had established web businesseson their own, typically offering a full range of products at pricessimilar to what was charged in their stores. These real-world

retailers were able to leverage their existing brands and operationalcapabilities to offer extensive shopping experiences. Footlocker.com,for example, offered over 14,000 products from 150 differentmanufacturers at prices equal to or lower than in-store prices.Footlocker.com also offered in-store returns of on-line purchases,easing the burden on the customer.

In 1999, six of the 20 largest sporting good retailers, including TheAthlete's Foot and the Sports Authority, signed deals with Global

Sports Interactive, the internet division of GSI, to manage not onlytheir websites but also their complete e-commerce operations.According to these deals, GSI handled the design, order fulfillment,processing, shipping, and business development involved with theretailers' internet businesses. The participating retailers simplychose their product lines and pricing strategy and generated webcustomers, but GSI managed the rest of the process. By developing

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a common sporting goods e-commerce infrastructure for itsmultiple retail partners, GSI claimed to lower drastically the costsassociated with electronic commerce. Each retailer collaboratedwith GSI in decisions related to its brand presentation, website and

e-commerce operations.NIKEs Direct Competitors

NIKEs competitors, the other leading athletic footwear and apparelmanufacturers, faced similar dilemmas and problems related totheir own e-commerce strategies. Because these competitors weresmaller and less powerful than NIKE, they were even more relianton their traditional retail partners for sales. These companiespossessed little or no experience selling goods directly to theconsumer market and treaded lightly in their initial forays into e-commerce.

By late 1999, virtually all of NIKEs major competitors (Adidas,Converse, Reebok and New Balance) had established websites withdetailed product information, store locators, and editorial contenton selected athletes or events. Each competitor, however, took aslightly different approach to the strategy and operation of its e-commerce capabilities. Converse offered no ecommerce functionality

or specific information on acquiring its products on-line. Adidasand Reebok each offered limited product lines at full retail prices totheir internet customers. New Balance adopted a hybrid approach,allowing customers to select any current product and then directingthem to the websites of its affiliated retailers (both real-world andinternet-only) who carried that product.

NIKEs competitors were generally more willing than NIKE to allowretailers to sell their products over the internet. The competitors did

not exert as much control over the end retail experience as NIKEdid and granted more flexibility to their internet retail partners.Reebok allowed both on-line only and bricks-and-mortars retailersto offer their full product lines (frequently at discounted prices) ontheir websites. New Balance was slightly more protective of bothproduct offerings and pricing, but not nearly to NIKEs level ofexcluding internet retailers from entire product lines. Adidas was

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the only major competitor who had taken a similar position toNIKE, severely restricting sale of product online.

Pure On-line Start-ups

As in many other consumer segments, sporting goods attracted anumber of internet entrepreneurs seeking to take advantage of thenew technology to exploit the inefficient cost structure of traditionalretailers. These internet endeavors included full-range retailers(such as fogdog.com) and highly specialized niche players (such aslucy.com, focusing on women's sports or chipshot.com, sellingcustom-made golf clubs). In addition to the internet retailers, manysports media concerns were eager to leverage their viewer base intoe-commerce customers. ESPN.com, a division of Walt DisneyCorporation, and SportsLine.com (partially owned by CBS) each hadavid followings among sports fans due to the content they had beenable to leverage from their media conglomerate owners. Each ofthose companies were making major pushes to convert theirwebsite viewers into purchasers.

NIKES INTERNET STRATEGY

Other Internet Sellers (Non-NIKE)

As new on-line retailers were created and traditional retailerslaunched their own internet initiatives, NIKE was bombarded withrequests from merchants to sell NIKE products on-line. Initially, thecompany was extremely hesitant; worrying that the NIKE brandvalue would be diluted by careless internet retailers.

"We saw a lot of online retailers who were not putting the rightemphasis on product presentation," explained Mary Kate Buckley.

"Our bricks-and-mortars partners offer a convenient location wherecustomers can feel the product quality and try products on wewere concerned that over time if everyone is selling the same thingonline, the only difference would be price."

NIKEs traditional retail partners were anxious to expand into on-line sales, but NIKE moved cautiously, allowing its largest retail

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partners to sell NIKE products on their websites, provided theymaintained the same standards enforced at the stores. Foot Lockerand Copeland Sports (through its shopsports.com division) eachstarted selling NIKE products, but Copeland quickly learned that

NIKE's concerns were to be taken seriously. In the summer of 1999,NIKE stopped selling to shopsports.com, explaining that "they werenot meeting our marketing standards."

Although NIKE resumed sales to shopsports.com shortly thereafter,the company's point had been made to retailers. By the end of1999, NIKE had approved ten of its bricks-and-mortar retailpartners to sell NIKE products over the internet. The companyremained unconvinced, however, that all those retailers would beable to deliver acceptable service levels, and continued to monitortheir performance carefully.

Some internet sellers were able to acquire NIKE products from otherretailers' overstocks and other unofficial channels. Once thesegoods had passed from the hands of NIKE-authorized retailers,NIKE no longer had any say over how the products were marketedor priced. Because NIKE handled its own international distributionand managed inventory liquidation through its own outlets,however, the company saw less of these after-market resales than

other manufacturers. In addition, NIKE strictly enforced salesagreements with retailers and actively policed the web for offenders.

Fogdog Deal

In September of 1999, NIKE signed a deal with internet sportinggoods retailer Fogdog Sports that allowed Fogdog to sell the entireNIKE product line on its website. Fogdog was given exclusive access(among internet-only sellers) to the NIKE product line for six

months in return for warrants to buy up to 12% of Fogdog's sharesat a pre-IPO valuation.

Fogdog Sports was founded in early 1998 (originally asSportSite.com) to sell athletic gear directly to consumers over theinternet. The company was the evolution of a web design and e-commerce Company started in 1994 by three graduates of Stanford

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University. In 1998 the company attracted venture capital financingfrom VenRock Associates and Draper Fisher Jurvetson. InSeptember of 1999, after negotiations with NIKE had begun, Fogdoghired Tim Joyce, formerly VP of Global Sales at NIKE, to be its new

president.Fogdog had repeatedly requested to carry the NIKE product line,only to be rebuffed by NIKE, like every other internet retailer. In theend, Fogdogs pricing policy of respecting manufacturersrecommended minimum prices and reputation was attractive toNIKE. Fogdog was able to point to three years of consistentlyexecuting its pricing policy. Due to its ownership stake, NIKE hadan incentive to make the deal work for both sides and agreed totreat Fogdog like any other major account, including preferredprices, joint promotions, and information sharing. Fogdog alsoreceived other special considerations from NIKE, such as productimages for display on the fogdog.com website, product and salesdata sharing, and unusual return privileges.

As part of the Fogdog deal, NIKE agreed not to sell to other virtualretailers including those sites managed by Global Sports, Inc. for atleast six months. This promise was sure to anger some of NIKEsmost important bricks-and-mortar partners, such as The Athletes

Foot, which relied on NIKE for 40% of their footwear sales. MichaelRubin, the young CEO of GSI, commented on the channel conflictthat NIKE faced: "Our six partners are all among NIKEs top 20accounts. NIKE needs to support them, and they need to be on theinternet in order to survive in the 21st century."

nike.com

The nike.com website was initially launched in August 1996 to

provide information and entertaining content to NIKE customers.There were no e-commerce capabilities on the site; instead, itreflected a typical NIKE approach to brand building. Differentsports received their own separate pages, with tips and advice fromNIKE athletes, news and updates on sports events, and detailedproduct information, including design inspirations and athleteendorsements.

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Despite the lack of e-commerce and no efforts to drive traffic to thesite through advertising expenditures, the nike.com site logged 14million visitors in 1998. At first, NIKE proceeded with extreme

caution on the internet. A plan to sell posters on the NIKE websitewas considered for nearly a year before being launched during theChristmas 1998 season. Over the next twelve months, however,NIKEs website strategy evolved substantially.

In February of 1999, Nike launched a test to sell its high-end AlphaProject line of footwear and apparel. In addition, the website wasredesigned to provide a store locator and more detailed productinformation.

In June of 1999, NIKE re-launched a completely overhauled andredesigned website, with greatly expanded e-commercefunctionality. NIKE made hundreds of its most popular productsavailable for purchase, all at full retail prices. The June re-launchwas the first time the companys senior management seemed tounderstand the revolutionary importance of the internet. PhilKnight commented to the media that "on-line commerce is a partialreturn to our original roots of selling products at track meets fromthe trunks of our cars -- rekindling the direct relationship between

NIKE and its consumers."

Despite the significant new push into e-commerce, NIKEmaintained much of its previous website focus on brand-buildingand inspirational content. NIKE added profiles on NIKE athletes ofall levels, new information on future product development, andinnovative new technologies. Many of the web functions were soadvanced that some consumers were unable to use them all withoutdownloading various plug-ins. "I wouldnt say were on the bleeding

edge of design technology, but I will say were on the bruised edge,"said nike.coms creative director, Bob Lambie.

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MANAGING NIKE.COM

Operational Concerns

Running a successful e-commerce business required distinctoperational capabilities that NIKE did not possess. Because NIKEhad no experience with remote order fulfillment, it lacked anyknowledge or expertise in packing and shipping boxes, trackingdelivery, or customer service. Rather than building each of thosecapabilities from scratch, NIKE chose to outsource the newfunctions to United Parcel Service (UPS). In a far-reachingagreement, UPS agreed to provide warehousing and shippingservices as well as a call center with 500 dedicated customer serviceoperators. It was uncharacteristic of NIKE to entrust their brandidentity to another company, but NIKE believed it was preferable todoing an inferior job in-house and afforded NIKE the opportunity tolearn and gather data.

To provide a positive experience for its e-commerce customers,NIKE needed vital new skills in web design, systems infrastructure,and other related IT areas. The company outsourced many of theseneeds and relied on proven market leaders like InterWorldCorporation for its enterprise commerce software and Red Sky

Interactive for website design and production.

Strategic Concerns

The new dedication to direct e-commerce over the nike.com websiteraised significant strategic concerns for NIKE and its partners.Traditional retailers of NIKE products, always concerned aboutbeing cannibalized by direct sales, had more reason to worry thanever before as they were denied the opportunity to compete head-to-

head with NIKE for internet customers. NIKE knew it would have tostrike a difficult balance to keep its traditional retailers contentwhile expanding the companys own direct sales efforts. NIKE hopedthat by maintaining full retail pricing on its site, it would alleviatetraditional retailers concerns over unfair competition. "We arehoping that our website will expand the pie, not take market shareaway from retailers," explained Mary

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Kate Buckley. Nevertheless, NIKE understood that the realopportunity for nike.com lay in defining a new, more profitablechannel for selling shoes and other goods to consumers. We want

to be cognizant of channel conflict, said Buckley, not apologize forit. In addition to the risk of alienating its retailers, NIKE wasconcerned about the experience of its e-commerce customers. NIKEhad never before had significant direct contact with consumers andwould now need to tailor the shopping experience to be consistentwith the NIKE brand. For products like athletic shoes, with a high"touch-and-feel" component, NIKE would have to find creative waysto satisfy customers desire to know how the products looked andfit. It was hard to see how NIKE could fulfill that need withoutcontinuing support from its bricks-and-mortars partners.

As NIKE considered further expansion into e-commerce, thecompany had to rethink its approach to nearly every core function itperformed or managed. Manufacturing standards would have tochange if NIKE was to ship goods directly to consumers who had torely on consistent sizing for sight-unseen purchases. NIKE neededto learn manufacturing planning and inventory management to suituncertain consumer demand rather than pre-determined retailerorders. The customization of marketing facilitated by the web gave

NIKE reason to rethink its approach to athlete selection as athleteswith smaller but intensely loyal fan bases could be better utilized.Direct-to-consumer sales also allowed for greater pricing flexibilityand forced NIKE to better understand price sensitivity acrossnarrow bands of consumers.

Organizational Issues

The rapid growth and extraordinary potential of nike.com created a

number of organizational dilemmas that defied easy answers. Theinitial stages of NIKEs e-commerce launch were conducted instealth mode by a small team that reported directly to the presidentof the company. Decisions were made quickly and often secretly, instark contrast to NIKEs culture of candor and consensus. Themedia eagerly reported on any new developments and speculated onwhat the future held for nike.com.

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Once it became clear that nike.com would play an integral role inthe future of the company, it became a vastly larger and morevisible department. Nevertheless, it retained an aura of distinction

within the company. At a time of disciplined spending within NIKE,the online division was seen as having an enviably large budget anda willingness to spend. When nike.com began reporting directly toPhil Knight in the summer of 1999, its stature within the companyand in the media increased. Despite rapid headcount growth and apreference for internal candidates, nike.com was unable to satisfythe ever-growing roster of internal applicants.

As other NIKE departments began to realize the fundamentalimportance of nike.com, they became involved in its major strategicdecisions. The sales department helped to ensure that online salespolicies were consistent with NIKEs fundamental standards andpolicies. The manufacturing department collaborated on plans toproduce customized shoes for specific online customers based onindividual preferences. The marketing department assessed everyreal world advertising campaign to determine how it could best bemodified for the on-line world.

New Opportunities

NIKE's e-commerce operations presented several new opportunitiesthat were not available to NIKE under its old wholesaling model. Forthe first time, NIKE was in a position to directly collect largeamounts of customer data, covering not only the demographics ofits customer base, but also customer shopping habits pricesensitivity, purchase frequency, and product bundling. With thisinformation in hand, NIKE would have the ability to market newgoods or services to exactly the right customers, increasing the

effectiveness of its extensive marketing efforts.\

Perhaps the most important new opportunity to NIKE was theability to capture the enormous mark-ups between wholesale andretail prices for its goods (see Exhibit 5 for a breakdown of the valuechain). NIKE had been extremely successful throughout its historyat managing its value chain while only participating in the central

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and core functions. By not performing either the manufacturing orthe selling in-house, NIKE had been able to grow dramatically whilestaying very profitable. Encroaching into the new territory of directsales presented NIKE with an opportunity to capture more of the

value chain than ever before.

THE FUTURE

NIKE understood throughout 1999 that the most important goalwas to learn as much as possible about doing business over theinternet. Mary Kate Buckley explained NIKEs internet philosophyin June of 1999: "The new site is really just the next stage in agrand experiment. . . More than anything, our work over the last sixmonths has proven that the future of internet presence for a globalbrand like NIKE will be in a constant state of incubation." At thesame time, Buckley understood that the real opportunity fornike.com lay in defining a new, more profitable way of sellingproducts to its loyal consumers. She began to think about whatsteps NIKE should take in the year 2000.