Outsourcing

The Manufacturing Practices of the Footwear Industry: Nike vs. the Competition
Steven Van Dusen
The current manufacturing practices of the sneaker industry, in particular companies such as
Nike, Reebok, Adidas, Converse, and New Balance, takes place throughout the globe. With the
industry experiencing severe competition, and the product requiring intensive labor, firms are
facing extreme pressure to increase their profit margins through their sourcing practices. The
following paper will analyze the sneaker industry, while examining the multitude of viable
manufacturing options, and critiquing their current manufacturing structure.
Footwear Industry Players, Revenues, Market Share
To properly review the manufacturing in the footwear industry, it is necessary to first gain an
understanding of the dominant leaders in the marketplace. The industry is currently experiencing
hypercompetition, led by six main firms Nike, Reebok, Adidas, Fila, Converse, and New
Balance (see exhibit 1), with nearly $7 billion in revenues domestically. Nike is the industry
leader, with a 47% market share, followed by Reebok, a distant second at 16%, and Adidas at
6% (see exhibit 2). This category is facing decreasing demand and the rising popularity of
alternative footwear, resulting in more pressure than ever before to achieve high gross margins
through effective global sourcing practices.
Manufacturing options
Footwear companies have two basic options in the manufacturing of their products, they can
both own and operate the factories that produce their products, or subcontract their products out
to secondary manufacturers. These facilities can be located either domestically or internationally,
and both present a myriad of positives and negatives. Firms that produce domestically benefit
from ease of monitoring, skilled workforce, government stability, job creation, and well
understood labor rules, while suffering from the relatively high wages required in the U.S. as
compared to developing countries. By manufacturing products overseas, in particular in third
world economies, tremendous efficiencies are gained in the form of reduced wages, but are
countered by the increased difficulty of monitoring the quality of their products and the actual
working conditions in the factories. Companies that are vertically integrated, who own and
operate the factories where their products are manufactured, are faced with large capital
expenditure requirements and the management of the factories themselves, resulting in lower
profit margins.
Strategic Outsourcing
In analyzing the sneaker industry, we are faced with the question, "What are these firms core
competencies?" If manufacturing falls under this umbrella, then firms should look to produce
internally. However, the core skills that set these companies apart from the competition, are their
marketing, distribution, and technological expertise. Applying the dominant sneaker companies
areas of expertise, lets review the following questions:
o
o

Is internalization a source of competitive advantage?

Is manufacturing a skill our firm does better than anybody else?

Will firms be able to leverage their manufacturing expertise in the future?

Are we releasing any of the firms proprietary skills/information by outsourcing?

With all of the above questions posed to any of the big four sneaker companies,
they would respond with a resounding "no". Therefore, in todays global environment, the most
strategically viable manufacturing strategy is the outsourcing of their products. The efficiencies
that are gained, in the form of shifting of risk, reduced capital requirements, lower wages, and
ability to focus on their core competencies, strongly outweigh all other manufacturing options.
The Evolution of Manufacturing in Third World Countries
As the economies of countries around world expand, so does their ability and skill level in all
facets of manufacturing. Beginning in London in the early 1900s, and followed through to the
present day, manufacturing in its simplest form consists of light manufacturing, which uses
unskilled labor to produce items such as shirts, shorts, and jeans. As the economy develops
along with the skill of manufacturing, countries begin moderately technical light manufacturing,
which includes footwear, outerwear and, performance sportswear. The next step in this growth
involves the production of technical consumer products such as radios, calculators, and
wristwatches. With the most developed economies gaining high levels of technical expertise,
manufacturing grows to include technical durables, which includes automobiles and computers.
This progression represents the advancement of economies throughout the world today, and
provides the reasoning behind sneaker companies manufacturing beginning in the United States
and Germany, and passing through Japan, Korea, and Taiwan, to its present day central areas
of China, Indonesia, and Vietnam. As these three countries progress over the next decade, and
large amounts of new capital is pumped into their economies, their standard of living will rise
along with their manufacturing expertise. Companies will be forced to relocate their
manufacturing in countries such as Cambodia, Pakistan, and underdeveloped regions of Africa
in search of lower wages.
Nike
Nike currently enjoys a 47% market share of the domestic footwear industry, with sales of $3.77
billion. Nike has been manufacturing throughout the Asian region for over twenty-five years, and
there are over 500,000 people today directly engaged in the production of their products. They
utilize an outsourcing strategy, using only subcontractors throughout the globe. Their majority of
their output today is produced in factories in China, Indonesia, and Vietnam, but they also have
factories in Italy, the Philippines, Taiwan, and South Korea. These factories are 100% owned by
subcontractors, with the majority of their output consisting solely of Nike products. However,
Nike does employ teams of four expatriates per each of the big three countries (China,
Indonesia, Vietnam), that focus on both quality of product and quality of working conditions,
visiting the factories weekly. They also developed their code of conduct in 1992 and have
implemented it across the globe, as its goal is to set the standard for subcontractors to follow if
they wish to do business with Nike. However, due to a manufacturing network of this magnitude,
they have faced numerous violations involving factory conditions and human rights issues, which
have been widely publicized. They have responded to these issues through the Andrew Young
report, the Dartmouth Study, and Ernst & Youngs continual monitoring, but are still
approximately two years away from completely addressing these problems throughout the
globe.
Reebok

Reebok, as the second leading manufacturer of footwear, has domestic revenues of $1.28 billion
and a market share of 16%. Similar to Nike, they also utilize a 100% outsourcing strategy and
manufacture their products throughout Asia. They have created and implemented their own code
of conduct for manufactures to follow, but have less infrastructure than Nike across the globe to
enforce it. They are facing scrutiny in regards to wage, overtime, and air quality issues, and like
Nike, are working to address these issues. However, their strength, the creation and distribution
of a global brand, is allowed to foster under this manufacturing strategy, as they focus on their
core competencies, and outsource their production.
Adidas
Adidas is currently enjoying the fastest growth of any brand domestically, with a market share of
6% and revenues of $500 million. They have been shielded from bad publicity by the two
Goliaths of the industry, Nike and Reebok, and are reaping the rewards substantially. They have
adjusted their manufacturing strategy, from a vertical operation in Germany in the 60s and 70s,
to an outsourcing focus today throughout Asia. Unlike the big two, they do not have a code of
conduct, and their factories are considered to be the worst in the industry. It is just a matter of
time before they are exposed, with an underground swelling of negativity already occurring
today. In order to avoid the negative effects and lost revenues that Nike and Reebok have
received, they need to immediately begin to take a proactive stance in regards to the working
conditions of their factories.
Converse
With a market share of 3% and revenues of $280 million, Converse manufactures their products
both domestically and internationally. It is important to note that the only product they continue to
manufacture in the U.S. today, is the Chuck Taylor All Star, with plants in Lumberton, NC and
Mission, TX. This is a product where the "Made in the USA" label is crucial to its success, and
internalization is a source of competitive advantage. These two factors serving as the sole
reason why the production remains within the U.S. All other shoe models are outsourced in Asia,
with the explanation of reduced wages driving this strategy. Converse, like Adidas, must also
generate a higher degree of internal monitoring of their subcontractors, or they will soon face
increased scrutiny
New Balance
New Balance is the one company that has kept a substantial amount of manufacturing in the
United States, and has a 3% market share with sales of $260 million. They currently operate five
plants in New England, employing over 1400 workers, that produces 50% of their output. With
this mixed strategy, of vertical integration and outsourcing, they are very unique, with their
strategic reasoning based on the advantages gained through higher levels of quality
domestically, and the "Made in the USA" label. They are in a highly specialized, niche business,
running shoes, and closeness of factories is more essential to their customer base than the
other companies because of special orders. For their most technical products they employ
outsourcing, following the strategy of their competitors. Although there is something to be said
for manufacturing domestically, they are straying away from the skills that they do better than
anybody else the design and marketing of the premier running shoe in the industry. Their longterm strategy should shift to a 100% outsourcing model, allowing them to control this niche for
the future.
Summary

Manufacturing in the footwear industry has evolved dramatically over the course of the last
century. As economies grow and skills are enhanced, production has been forced to spread to
less developed regions around the world. While Nike, Reebok, Adidas, Converse, and New
Balance each have their own manufacturing structure, the reason behind their rise to dominance
in this industry is their ability to focus on the core skills that they perform better than anybody
else. The outsourcing trend that dominates the industry today will only increase in the future.
The major issues facing these firms today, working conditions and human rights, must be
addressed in the short-term. Through either one firms leadership, or all footwear companies
strategically aligning, these issues will be addressed; the question is "Just how long will it take
before the footwear companies say Just Do It?"
http://www.unc.edu/~andrewsr/ints092/vandu.html
Copyright, 1998
Van Dusen, INTS 092
UNC - Chapel Hill

The Advantages of Outsourcing for Nike

By Robin McDaniel, eHow Contributor

Nike outsources much of its work.

The Nike brand is one of the most recognizable in the billion-dollar footwear industry, and the company is
commonly known for its outsourcing practices. Nike is known for their shoes, but they have also branched
out into the sports and clothing industries. Nike has hundreds of factories and various subcontractors it
uses to design and manufacture its products. Outsourcing has many possible advantages for the Nike Corp.

1. Cuts Costs
o

Decreasing overhead through outsourcing is a valuable resource for Nike. Cutting costs by
employing workers at a reduced rate or paying less for plant operation allows Nike to
invest the additional profits into other areas of the business such as advertising, thereby
increasing the potential for company growth. In addition, decreased operational costs are
more likely to attract and retain company investors because more money can go into
increasing business profitability.

Increases Competitiveness
o

Because Nike is able to more efficiently produce its product and reduce costs due to
outsourcing, it can more competitively price its products. This enables Nike to price its
brand at a competitive rate with other companies that sell a similar product. Decreasing
competition can help Nike corner the market for its particular products.

Finances and Risk Reduction

o

Outsourcing allows Nike to skirt some of the financial obligations it might face with the
confines of tax laws in the United States. In addition, when it outsources to subcontractors,
Nike assumes less risk associated with producing its product such as insurance liability.

Read more: The Advantages of Outsourcing for Nike | eHow.com

http://www.ehow.com/list_7704795_advantages-outsourcing-nike.html#ixzz22INlfzJo

Nike Business Level Strategy

To distinguish its brand and increase customer loyalty, Nike uses differentiation business level
strategy. It offers high quality goods and acceptable price. Nike is perceived as something fancy, in
terms of sport goods manufacturer.
The company segments its products in different ways. First of all, it manufactures sports goods and
accessories for three different Demographics: men, women and children. Each segment is carefully
examined in terms of physical capabilities, sociological needs, and design preference. Along with business
level strategy it should be mentioned that Nike uses strong diversification (Corporate level strategy) to
support its product differentiation. These products create value and increase customer satisfaction:
Apparel, accessories, such as Nike watches or gym bags, as well as performance equipment, including
sport balls, timepieces, eyewear, skates, bats, gloves etc. Nike produces goods for every type of major
sports: running, basketball, tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling,
cheerleading, aquatic activities, hiking, fencing etc. Such wide variety of goods is an attempt of Nike to
increase Affiliation dimension. Nike constantly looks what could be added to current product range to
increase customer satisfaction and strengthen the links between company and client.
Major advantage of manufacturing a number of product lines is the reduction of risk. In such
multiproduct portfolio, if one product is not successful, there are numerous others to compensate this risk.
Besides just offering differentiated goods, Nike also adds value with the opportunity for customization.
NIKE designs most of its footwear for athletic use; however, in order to diversify its products, a
large percentage of their products come from sales of footwear, apparel, and accessories for casual and
leisure purposes. It targets the clients who can afford higher price compared to the products which are
positioned using cost-leadership strategy. Major reason to pay higher price is the brand itself, and all
perceived benefits that are firmly connected with having Nike.
Besides the two segmentations described above, NIKE also has agreements for licensees to
produce and sell NIKE brand items aside from athletic footwear and apparel. In part, this product
differentiation is accomplished through strategic management planning by having the company sell NIKE
brand timepieces, childrens clothing, school supplies, electronic media devices, and other items. Using
such strategy Nike increases firms access and connection to customers the reach dimension.
According to Nike Annual Report, company will maintain high quality and acceptable price as
major strategy for growth. We have shared information on the companys growth strategy, including our
aim to achieve revenue of $23 billion by FY11. This strategy is the context for our corporate responsibility
efforts. We aim to achieve this growth by delivering premium products, growing in our geographic regions
and elevating the retail experience.

Posted by Davit Sioridze at 9:41 PM

Nike and Outsourcing

Sport goods producer companies have two options for manufacturing their products. They can own
and operate the factories, or look for the ways of outsourcing. Facilities that are enough efficient for
outsourcing, could be located either domestically or internationally. Outsourcing to domestic firms (US)
gives advantage of easy monitoring, skilled workforce, well understood labor rules, but on the other hand
it is relatively expensive if compared with outsource in developing countries. By manufacturing products
overseas, in the third world economies, tremendous efficiencies are gained because of low salary expense,
but in this case company has to face increased difficulty of monitoring the quality of their products and the
uncontrolled working conditions in the factories.
Nike uses outsourcing strategy, using only subcontractors throughout the globe. It currently owns a
47% market share of the domestic footwear industry, with sales of $3.77 billion. Nike has been
manufacturing throughout the Asian region for over twenty-five years, and there are over 500,000 people
working for Nike. Vast majority of production comes from China, Indonesia, Vietnam, Philippines,
Taiwan, and South Korea. Factories in these countries are owned by subcontractors, with the majority of
their output consisting solely of Nike products.
To avoid pressure from customers and legal cases against the company, Nike employ teams of four
expatriates per each of the big three countries (China, Indonesia, Vietnam), that focus on both quality of
product and quality of working conditions, visiting the factories weekly. They also developed their code of
conduct in 1992 and have implemented it across the globe. Its goal is to set the standard for subcontractors
to follow. However, company still faces problems with executing code of conduct because most of the
factories are owned not by the company, but by subcontractors. Factory conditions and human rights
issues have been widely criticized by different pressure groups. Even though company responded these
issues with Andrew Young report, the Dartmouth Study, and Ernst & Youngs continual monitoring, Nike
still needs couple years to eradicate mentioned problems.
I. Summary of case facts
Nike is one of the leading athletic footwear companies. Nike has had a dramatic increase in revenue in the
last two decades. In 1985 the U.S. spent $5 billion dollars on Nike apparel and in 2001 that increased to
$13 billion.
Nike decided to do some outsourcing for their labor. This decision caused much controversy. 1994 a lot of
criticism was pointed at Nike, Inc. Many criticisms came from publications such as: The New Republic,
Rolling Stones, The New York Time, and The Economist. The criticisms involved Nikes outsourcing for
labor. The critics stated that Nike was responsible for where there products were created. The
countries/factories paid low wages, had poor working conditions, and had young child laborers
They decided they needed to change the way they do business. In 1992 Nike created a Code of Conduct,
which set forth many rules to cleaning up the way their outsourcing had been done. Nike hired employees
to inspect/check on the factories that were doing business with Nike in-order to assure a good work
environment. Nike has also contributed too many non-profit organizations.
Nike is involved in the United Nations Global Compact, founders of the Global Alliance for Workers and
Communities, and active in the Fair Labor Association. Nike knew many changes had to be made in order
to keep a good image for their company and increase revenue.

II. Statement of problem

Nike wanted to increase their revenue by outsourcing the labor of their products. By outsourcing Nike
would not have to pay as much to have their products created. Other countries outside the U.S. do not
charge/pay as much for labor. Nike moved factories around from a lot of countries trying to get the best
profit for their production.
Nike started opening up factories in countries like Indonesia, Pakistan, and Vietnam. This was a bad idea
because Indonesia paid workers extremely low wages, not enough for people to live on. Pakistan does not
have an age limit where children can work; so many children in Pakistan were making Nike apparel. In
addition Vietnam had very poor work conditions.
Many publications found out about these labor acts and started making people aware of how Nike is doing
business. Nike was criticized for how they produce their products. This was giving Nike a bad image to
the public.
III. Alternative Solution
Nike was telling these critics that they were not responsible for how the products were created, because
they were simply managers and marketing. This was not a very productive solution.
In 1992 Nike had created a Code of Conduct for all the factories that produced their product. This was a
start in monitoring how labor and production was done; however, that was not enough because Nike also
needed to hire employees to monitor the factories and make sure the Code of Conduct was enforced. Then
to cover up any misdeeds on their part they decided to involve themselves in many non-profit
organizations which benefited labor laws.
IV. Recommendation
I think Nike did very well on making sure that their outsourcing was done in a civilized manner. Though, I
think the whole non-profit organization involvement is kind of like a big gesture stating, Hey look at us,
were good now. We want everyone working in a civil and healthy environment! I think that gesture is
kind of a hypocritical statement. All in all I do think that this may have saved them from many
companies/organizations switching to an alternate athletic apparel brand.
Im not to sure if this had been done, but I think it would have been very appropriate for Nike
representative to give a public speech. Publicly announce that they have changed the way they are doing
business and possibly apologize for any misconstrued image or false representation to the consumer.

The Benefits of Outsourcing for Small Businesses

Outsourcing the practice of using outside firms to handle work normally performed within a company
is a familiar concept to many entrepreneurs. Small companies routinely outsource their payroll
processing, accounting, distribution, and many other important functions often because they have no
other choice. Many large companies turn to outsourcing to cut costs. In response, entire industries have
evolved to serve companies' outsourcing needs.
But not many businesses thoroughly understand the benefits of outsourcing. It's true that outsourcing can
save money, but that's not the only (or even the most important) reason to do it. As many firms discovered
during the outsourcing "mania" of the early 1990s, outsourcing too much can be an even bigger mistake
than not outsourcing any work at all. The flat economy caused many companies into huge layoffs and

subsequently outsourced functions that were better kept in-house. Wise outsourcing, however, can provide
a number of long-term benefits:
Control capital costs. Cost-cutting may not be the only reason to outsource, but it's certainly a major
factor. Outsourcing converts fixed costs into variable costs, releases capital for investment elsewhere in
your business, and allows you to avoid large expenditures in the early stages of your business.
Outsourcing can also make your firm more attractive to investors, since you're able to pump more capital
directly into revenue-producing activities.
Increase efficiency. Companies that do everything themselves have much higher research, development,
marketing, and distribution expenses, all of which must be passed on to customers. An outside provider's
cost structure and economy of scale can give your firm an important competitive advantage.
Reduce labor costs. Hiring and training staff for short-term or peripheral projects can be very expensive,
and temporary employees don't always live up to your expectations. Outsourcing lets you focus your
human resources where you need them most.
Start new projects quickly. A good outsourcing firm has the resources to start a project right away.
Handling the same project in-house might involve taking weeks or months to hire the right people, train
them, and provide the support they need. And if a project requires major capital investments (such as
building a series of distribution centers), the startup process can be even more difficult.
Focus on your core business. Every business has limited resources, and every manager has limited time
and attention. Outsourcing can help your business to shift its focus from peripheral activities toward work
that serves the customer, and it can help managers set their priorities more clearly.
Level the playing field. Most small firms simply can't afford to match the in-house support services that
larger companies maintain. Outsourcing can help small firms act "big" by giving them access to the same
economies of scale, efficiency, and expertise that large companies enjoy.
Reduce risk. Every business investment carries a certain amount of risk. Markets, competition,
government regulations, financial conditions, and technologies all change very quickly. Outsourcing
providers assume and manage this risk for you, and they generally are much better at deciding how to
avoid risk in their areas of expertise.
For an in-depth look at the benefits of outsourcing employees, read the AllBusiness.com Buyer's Guide,
The Scoop on Outsourcing HR using PEOs.
Source: http://www.allbusiness.com/human-resources/workforce-management-hiring/10841.html#ixzz22IO9uFo7

The Ethics of Outsourcing

An Analysis Regarding Modern Day Issues
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Jobs most would not work; pay too low to live upon; working conditions fraught with health concerns.
Issues of negligence, exploitation, and child labor run rampant. Alike, the world economy depends on it.
Third world hunger is battled through it; lives are saved. It is one of the most controversial issues in

business: outsourcing. This issue has developed and evolved as a result of the need for cheap labor and the
clear reality that such labor exists in developing countries. It seems quite obvious that a corporation able
to develop a practice in order to maximize on this opportunity would also be able to increase its profits,
thereby ensuring the satisfaction of its shareholders and the future success of the company. However,
while there are positive aspects to the implementation of outsourcing, there are also negative aspects that
may not have been foreseen by the founding fathers of this revolutionary business concept.
There are three specific types of outsourcing: on-shoring, on-site off-shoring, and off-shoring. Of these
three, two of the types will be examined in relation to Nike and a variety of small Japanese companies in
this analysis. The two specific types of outsourcing that command the majority of the attention
surrounding this issue are on-site off-shoring and off-shoring because they both deal with the use of
foreign labor. These most directly impact the home countries of the corporations because they decrease the
amount of jobs available to the citizens in those countries. For this reason, they are deemed the most
controversial of the three.
The controversy of these concepts lies not in the practice of outsourcing itself, but in the ethical issues that
surround it. Many topics are addressed by those who are concerned about outsourcing such as the
exploitation of foreign workers, the loss of domestic jobs, and the economic distribution of profits gleaned
by the implementation of outsourcing. Further examination of offshore and on-site offshore outsourcing,
in regards to how they developed and became known as offshore BPO, demonstrates how these two topics
have become an extremely controversial issue regarding ethics in the business world.
Outsourcing Defined
Business Process Outsourcing, or BPO, also simply known as outsourcing, is considered to be one of the
most controversial business practices today. The use of this process is complex and can vary in many
ways. It is most easily defined as a, "work arrangement made by an employer who hires an outside
contractor to perform work that could be done by company personnel" (Britannica.com). Each of the three
different types of BPO relate specifically to a different business practice.
The Three Types
The idea of outsourcing began with the practice of onshore outsourcing. Companies started using outside
businesses, or subcontractors, to perform services such as accounting, marketing, and other services that
are important to the company, but that do not directly relate to the particular good or service being
provided. These subcontractors are domestic, or onshore. Some businesses started to then realize the value
of the on-site offshore model. This type of outsourcing is very similar to onshore, but rather than using
already established domestic subcontractors, foreign labor is brought to the domestic location. An example
of this is the green card employment system within the United States that allows foreign workers the right
to work in the US for a certain amount of time. Some businesses saw a value of taking these two models
one step further: offshore outsourcing. It is the most controversial of the outsourcing models; it is
understood to be "sourcing any part of an organization's activities to a location outside the company's
home country. Companies create captive centers offshore, where the employees work for them or a
subcontracted entity" (Brown 350).
Offshore outsourcing is considered to be the most rewarding type of BPO, yet is the most complex as it is
a relatively new way of conducting business (Click 23). It started when companies began moving factory
jobs to other countries. Some criticized this practiced and others raved about it. Many times, the
advantages outweighed the disadvantages. It is speculated that a U.S. business manager can cut their
overall costs by 25-40 percent (Click 24). Some say that the practice of offshore outsourcing helps
stimulate both the economies of developing countries and of companies that bring their businesses
overseas. Criticisms of this model have led to many ethical dilemmas regarding outsourcing.

The Ethics of Off-shoring

While outsourcing has become a business standard in the United States and in other technologically
advanced countries such as Japan, its implementation has brought forth many questions as to whether or
not it is ethical with regards to its impacts on the jobs of United States and Japanese citizens. More
specifically, off-shoring and on-site off-shoring have become ethical hot topics in recent years because of
the many advantages and disadvantages to implementing these forms of outsourcing. The reconciliation of
these positive and negative sentiments regarding off-shoring and on-site off-shoring will only be achieved
as a result of increased education. In order to make an educated decision regarding whether or not offshoring or on-site off-shoring are ethical, a thorough investigation of both sides is required.
Positive Aspects of Off-shoring
Those who argue for the implementation of this business practice use approaches such as the opinion that
"when a product or service can be produced more cheaply overseas, it makes more sense to import it than
to produce it domestically" (Reh, 2006, Arguments For section). This argument relies solely on a
commonsense reality. Oftentimes it is less costly for a corporation to manufacture its products in countries
where labor is cheaper. Therefore, it appears to be the best thing for the corporations to do in order to
maximize profits and to keep shareholders happy. Also, the increasing demand for corporate social
responsibility is a large argument for off-shoring in that corporations are providing jobs and salaries for
people in developing countries (Reh, 2006, Arguments For section). According to Sweta Patel, "offshoring is opening the doors for employment and transforming people into professionals" (Patel, 2004,
Worried Unions section). This argument appeals to a more emotional aspect of off-shoring. The act of
providing jobs to developing countries coincides with this outcry, thus advocating for corporate offshoring.
Negative Aspects of Off-shoring
While off-shoring has many positive ethical aspects, there are few corporations who are willing to publicly
admit their implementation of off-shoring because of its negative connotations (Patel, 2004, para. 3).
Ethically speaking, there are many arguments against this business strategy. Many argue that "the
considerable profits to be made from off-shoring are retained by the rich, while the middle class pays
higher taxes and loses purchasing power" (Reh, 2006, Arguments Against section). Because of the many
negative sentiments regarding the government's economic distribution of wealth, any business practice by
corporations that is seen as contributing to this discrepancy will be negatively regarded by the public. In
addition, John F. Reh states that "foreign workers do not contribute to US Social Security or other taxes.
The increased tax revenue from corporate profits does not equal the amount lost on US workers' income
taxes" (Reh, 2006, Arguments Against section). The negativity United States citizens feel regarding the
loss of many job opportunities and the additional wound exacted as a result of the discrepancy as far as
income taxes are concerned contribute a great deal to the opposition toward the principle of off-shoring.
Another ethical issue is that of CEO compensation. With regards to off-shoring, an opinion held by those
who are opposed to it is that "companies could save more costs by off-shoring the CEO Job. The average
US computer engineer earns six to seven times his Indian counterpart, but the US CEO gets paid 400
times as much as his average worker" (Reh, 2006, Arguments Against section). This is a further blow to
workers who are losing their jobs to off-shoring in order to save the company money.
Negative Aspects of On-site Off-shoring
The negative aspects of on-site off-shoring are similar to those of off-shoring. While jobs are closer to
home with this model, they are still being held by workers who are not citizens of the company's home
country and the model is still contributing to the home country's citizens' loss of jobs.

Because these two specific types of outsourcing focus on sending the jobs of a company overseas from the
country in which it originated, the ethics of decreasing job opportunities in the company's home country
comes into question. The labor in the countries to which companies send their jobs is cheaper and more
abundant, but whether this business strategy does more harm than good needs to be evaluated. On one
hand, many people are of the opinion that off-shoring not only benefits the company by maximizing
revenue and increasing shareholder profits, but that it also helps those in impoverished countries by
providing jobs for those who would otherwise be out of work (Echolist, Feb. 28, 2000, para. 1). On the
other hand, citizens of a company's host country become frustrated with the prospective of off-shoring
because it threatens the availability of jobs and its only marginal benefits are not enough to validate its
implementation (Reh, 2006, Arguments Against section). While there are positive and negative aspects of
outsourcing, it is important to reconcile these discrepancies in order to make an educated decision as to
whether or not it is ethical. Nike has dealt heavily with these positive and negative aspects of outsourcing
throughout their years of global business.
Nike
"Nike financially contributed to the films Malcolm X and Hoop Dreams. Though the films are certainly
provocative and worthwhile, does Nike truly support people who struggle against discrimination and
inequality or is the company only trying to "win votes" with consumers who identify with such problems,
like African-Americans and women? An actual Nike advertisement reads "We let our fears stand in the
way of our hopes. We sit quietly when we want to scream. Why?" Is this ad also trying to recruit the
population of people who are routinely mistreated within society to stand up and fight back? If so, then
why does Nike discredit its own advertisement by supporting abusive labor practices that operate using
fear and intimidation? And how can Nike justify giving Michael Jordan $20 million dollars in
endorsement fees while their own employees are living below the poverty line" (Christensen, 2003,
International Outsourcing and Nike)
Many major US firms have realized the value of outsourcing. The multinational US Corporation, Nike,
has realized this value through the specific use of offshore outsourcing. Nike designs their products within
the US, and then subcontracts to low cost production facilities overseas (Smit, 1994). These facilities can
be found in many Asian countries such as: South Korea, Japan, Pakistan, China, Vietnam, Indonesia, and
India (Haq, 1996, Collaboration section). The use of these subcontracting firms has lead to discrimination
of the firm's practices. Many organizations are scrutinizing Nike for their employment of severely
underage children, their lack of health regulations, and their unlivable wages. While, by law, Nike is
responsible for the fair treatment of all of their employees, the use of subcontractors often veils the
misconduct that is occurring in their overseas workshops. While Nike's use of off-shoring has attracted
negative media, it can also be said that their presence in these third world countries has dramatically
increased the standard of living for their underprivileged workers (Harsono, 1996).
Claims Against Nike: Exploitation of Workers
Nike has denied claims that the company knowingly employs children in their workshops. However, in
Pakistan, it is clearly documented that while child labor is illegal, the Pakistani government is reluctant to
enforce these policies. Seeing the favorable opportunity, Nike capitalized in Pakistan and failed to take
any precautions to prevent the use of child labor in the production of their products (Joseph, 1996). This
child labor crisis is further increased by the countries low per-capita income. The average middle-class
person in Pakistan earns about five dollars a day, which is typically stretched to feed a family of ten.
Along with their low income, Pakistani families also face extremely high inflation rates. These financial
hardships often cause families to reluctantly give their children into child labor. As a result, about half of
the world's soccer balls are produced in Pakistan by children as young as six years old (Boggan, 2001).
"Companies like Nike make use of repressive regimes like Indonesia's and China's to suppress worker

efforts for better wages and working conditions. No savings are passed on to consumers despite the low
wages paid workers abroad." (Haq, 1996, Collaboration section)
It is Nike's responsibility to monitor their subcontracted companies to ensure that they are abiding by
international rules and regulations. In turn, it is expected that the contracted firm act according to these
rules and regulations. However, because both companies are aiming to minimize their manufacturing costs
and earn the highest amount of profits, this system of checks and balances is not sufficient. In addition,
illegal practices such as child labor and unhealthy working conditions often go overlooked. Frontlash, a
youth organization of the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO)
claims, "Companies like Nike make use of repressive regimes like Indonesia's and China's to suppress
worker efforts for better wages and working conditions. No savings are passed on to consumers despite
the low wages paid workers abroad." (Haq, 1996, Collaboration section)
Claims against Nike: Right to Basic Freedoms and Health
Claims against Nike have not only sprung from illegal child labor, but also from hazardous working
conditions and negligence. In an inspection report filed for the company's private use, Ernst and Young
concluded that workers in a factory near Ho Chi Minh City were exposed to toluene, a harmful
carcinogen. This carcinogen is known to cause damage to the liver, kidneys and central nervous system,
and was found in amounts that exceeded standards by 177 times the legal limit. It was also documented
that over 77 percent of the workers suffered from respiratory problems. The leaked report further
concluded that the company's subcontractor was forcing its workers to work over 65 hours a week, well
over what Vietnamese law allows. (Greenhouse, 1997, second para).
In a separate report taken at the Tae Kwang Vina factory, Ernst and Young again found cases of
negligence. The report painted a dismal picture of young women working well over 65 hours a week in
unsuitable conditions. The report found that, "dust in mixing room exceeded the standard 11 times," and, it
added, "There's a high rate of labor accidents caused by carelessness of employees." Later, the report
pointed to two other problems: "workers' inadequate understanding of the harmful effect of chemicals"
and "increasing number of employees" with health problems continue to work with chemicals (Hammond,
1997, para 2). It is evident that Nike has failed to ensure the well-being of their offshore employees as
well as maintain their system of checks and balances with their offshore companies.
"The rights to freedom of association, the right to strike and freedom from forced labor are not guaranteed
in Indonesia," said the Asia Watch petition. "In fact, when workers have attempted to form independent
unions or to carry out strikes, they have been hindered by excessively restrictive government regulations
and by harassment, intimidation, intervention and beatings by members of the Indonesian security forces"
(Etantor, 1992, Labor Practices Criticized).
Controversy of Developing Nations
From Thailand to South Korea and in many different businesses, industries depend on low-cost labor to
help those countries industrialize, raise the minimum wages, and drive them into more successful
manufacturing nations. Each day many new third world countries attempt to lure large corporations to
their country through low minimum wages, lack of labor laws, and the clear ability to provide cheap
production of their products. Indonesia, for example, has a minimum wage that US officials have stated to
be just 65% of realistic livable wages to cover just food and shelter expenses. "'The situation here is
similar to the end of the last century in America and Europe -- half work and half slavery,' said Jakarta
labor activist Indera Nabadan, who closely monitors the shoe industry" (Staff Journalist, Nike and Labor).
In reality the workers are the driving force of their growing economies, but they are being highly exploited
to realize this growth. The average shoe costs about $14 for Nike to manufacture including the wages,
overhead, and materials. Nike sells their shoes for an average of $75. This difference of $60 goes directly

back to corporate profits and is what equated last fiscal year (2006) to 6 billion dollars in revenue (Van
Dusen, 2004, The Manufacturing Practices of the Footwear Industry). This controversy of developing
nations is a continuing debate that has seen sanctions from the US government amongst many others
around the world. While these government regulations do have power and have made changes, they have
not impacted these problems as much as consumer power.
US Consumer Power
US consumer power can be a swift hand to change when truly realized. An individual can affect the
bottom line of a multinational corporation through his or her buying habits. Consumers are those who give
these companies, such as Nike, huge profits and bottom lines in their financial documents. Though Nike
has serious issues of negligence, child labor violations, and harassment, Americans continue to purchase
material objects such as fancy shoes and brand names. How much importance is in what we walk around
in? The reality is that we are spending upwards of $100 on a company's product that treats its workers
extremely poorly (Christensen, 2004, International Outsourcing and Nike). A shoe was historically created
to protect the foot, why do consumers spend so much for this? For mark or style? Can we give up such
things and use consumer power to show Nike their practices are wrong? The United States is not the only
country that is implementing the business tactic of off-shoring. Many small companies in Japan have been
participating in it as well.
Outsourcing in Japan
Japanese companies, like so many others, have been outsourcing foreign labor. The most popular method
of outsourcing (especially for IT-related companies) is offshore outsourcing. This involves the exportation
of a product from a developed countryy to areas of the world where there is political stability, lower labor
costs, and/or tax savings. These companies then sell precision products that have been programmed by
companies, for example, in India. Again, this is due to the lower expense(s) of domestic companies, which
still offer the same quality as other competitive IT-related companies. Offshore outsourcing has proved to
be a win-win situation to both the entrusting, and the entrusted companies. Since the IT-bubble of 2001 in
the US, the economy in India has been growing rapidly. The annual inflation rate has maintained
approximately 10% over the last several years in India. (Bradsher, 2007) Despite the negative implications
of such a high inflation rate, the Indian rupee, the local currency, against the US dollar has decreased from
48 to 41 rupees between 2002 and 2007 due to the gain in the value of India rupee. Although the economic
growth in India proves to be a positive attribute to the country, not all offshore outsourcing companies
have such intentions in mind.
The "3 Ks"
Some, but not all, Japanese companies (especially small or private companies) greedily take more
advantage of outsourcing. This avarice comes in the form of jobs that are called the "3 Ks". (Khan, 2003)
"3 Ks"is a coined phrase originating in Japan. The 3 Ks respectively stand for "Kiken" (Dangerous),
"Kitanai" (Dirty), and Kitui (Stressful) Jobs that are considered to be dangerous, dirty, or stressful are in
the least demand by people in Japan. To maintain an efficient workflow for those undesirable jobs,
companies outsource to foreign laborers via on-site offshore outsourcing. Typically, these foreign laborers
come from rural areas in China.
Despite present-day economic growth in China, the gap between the rich and the poor is still tremendous.
In most rural areas of China, jobs are scarce, as are the dollars being paid for such employment. (Lim,
2004) Nikkei Journal (2006, May 10) reported that the minimum monthly salary established by the
Chinese Labor Law is $70 USD. However, in actuality, approximately 300 million out of the entire
Chinese population of 1.3 billion people receive $70 USD or more. The other 1 billion people receive less
than $70 USD a month. Another restriction of the Chinese labor law is the limit on the weekly labor hours.

The greatest number of hours that can be worked over the course of a week is 40. Sadly, the reality is that
most laborers usually work a 70 hour week. This indicates that the majority of Chinese laborers work for
less than 23 cent an hour. Vis--vis, the lowest hourly wage in Japan is about 650 yen, which
approximately is $5.50 USD (according to the Japanese Minister of Health, Laborer and Welfare, Oct. 10,
2006).
The Minimum Wage Controversy
Due to this vast difference in minimum wage, Japanese companies will willingly hire Chinese laborers at
the minimum wage. These low salaries usually accompany a job belonging to the 3 Ks. Even so, those
indigent Chinese laborers signed the contract because the pay being offered is higher than their previous
salaries. Some companies will even offer cheaper wages than minimum (which, needless to say, is illegal
by the Japanese Labor Laws). Notwithstanding, the Mainichi Journal (2007, may 13) reported an incident
involving three Chinese laborers who escaped from a Japanese sewing company in Aomori. Their
"untimely resignation" was because of the extremely hard work they were being forced to do for less than
minimum wage. According to Mainichi, the Chinese laborers worked more than 13 hours a day. Although
the city of Aomori has a minimum wage rate of 605 yen, the overtime pay offered to them was only 350
yen (about three dollars) per hour.
Conclusion
In a final analysis, it is evident that the evolution and development of outsourcing into three different types
known as on-shoring, on-site off-shoring, and off-shoring have both positive and negative aspects about
each of them. The use of outsourcing surrounds a handful of ethical issues. Off-shoring and on-site offshoring were examined in this analysis and sparked questions as to whether these practices are ethical or
not. This is because they involve the use of foreign labor that takes away jobs from corporations' countries
of origin; in this case, the job markets of the United States and Japan.
Benefits of outsourcing can come at the expense of the worker and instead benefit consumers,
shareholders, and the privileged. However, developed countries are able to provide employment,
strengthen the economies of developing nations, and provide opportunities for foreign employees in those
countries to gain new skills and advance their education. In addition, there are reports that corporations
such as Nike and smaller companies in Japan subcontract with other companies to hide their unethical
manufacturing or technological factories overseas. Questionable practices include hiring underage
employees, overworking them, placing them in dangerous and unhealthy work conditions, barring them
from forming unions and paying them poor wages stimulate further ethical controversy.
Consumers have the power to strengthen factory conditions in offshore outsourced operations. If
consumers refuse to buy products manufactured by a company that does not comply with acceptable
working conditions and standards, those organizations can face extinction. Without consumer support, the
most influential corporations cannot exist. It is important for consumers to recognize what kind of
companies they are purchasing their goods from and why.

Supplier Involvement in product development and innovation: The Tata Nano story.
Tata Motors is the largest automobile company in India with consolidated revenues of about 14 billion
dollars in 2008-09. It is the country's market leader in the commercial vehicles segment and holds the third
position in the passenger vehicle segment. It is the world's second largest bus manufacturer and fourth
largest truck manufacturer. Through associate companies and acquisitions and subsidiaries Tata Motors
has operations in the UK, South Korea, Thailand and Spain also containing the two iconic British brands
the Jaguar and The Land Rover. It also has an industrial joint venture with Fiat in India. The Tata brand of

vehicles are marketed in several countries across the world including parts of Europe, Africa, The Middle
East, South Asia, South east Asia and South America. (www.tatamotors.com)
Tata Motors has clearly shown its emergence as an international player with acquisition of Jaguar/Land
Rover from Ford Motors and the launch of Tata Nano, the One Lakh Rupees ($2500) car. The price tag of
$2500 of the Tata Nano is a clear indicator of Tata's strategic superiority in the context of its supply chain
networks. The Nano must have a highly reliable and low cost supply chain network to produce the demand
that it to create and satisfy in order to be profitable after accounting for materials, transportation,
overheads and taxes.

Systems of innovation approach:

A network can be defined as a specific type of relationship that exists between a defined set of persons,
objects or events (also called nodes or actors) involved in different processes and activities that produce
value to the ultimate customer in the form of products and services. (Mitchell, 1969) (Christopher, 1992)
Let us consider the firm i.e Tata to be the main actor who performing activities by utilising the resources
available to them.
The Interaction between the network of actors, network of activities and network of resources:

Tata Motors and Tata Nano design team: The Tata Nano team started off with 4 members of
Tata Motors studying the feasibility of such low cost car. Once the feasibility of such an idea was
established more members from various departments got involved and a design team was created
and set to task of designing the world's cheapest passenger car. This process involved the
generation of ideas from all contexts and then screening of the generated ideas to find the best
ones.
Suppliers: Tier 1, Tier 2, and Tier 3: Taking into consideration the needs of the project, the design
team went sourcing for the right suppliers and vendors who had the capacity and capability to
supply to this project. They used the help of a company called Ariba Inc. who provide on-demand
spend management solutions, to achieve the right combination of tier 1 suppliers. These suppliers
were also initiated into the design process from the early stages itself. The Tata Nano team settled
for about 100 tier 1 suppliers out of the thousand others to whom invitations were extended based
on their expertise, reliability and capability in terms of being able to deliver large quantities.

Distributors: The Distributors play an important role in this project as the Tata Nano is to be built
in the form of kits and shipped to distributors where it will be assembled and delivered to the
customer.

Competitors: The nearest competitor the Maruti-Suzuki 800 is still 100% more expensive than the
Nano. And other competitors are yet to finalise their offerings in this segment. So clearly the Nano
has the first mover advantage here.

Customer: The customer being targeted here is largely the motorcycle using population and also
the section of people wanting to buy their second car. The customer in India is willing to wait from
3 months to 1 year for delivery of the car which works very well for this model.

Government regulation: The Tata Nano meets all government set safety regulations and goes one
step further by being more energy efficient and having less carbon footprint when compared to
other cars in its segment and also quite a few motorcycles. The government has also helped Tatas
find land and set up their plant in Sanand, Gujrat, India.

Local people: Tata Nano has picked engineers from the local universities like Indian Institute of
Technology, Kharagpur, and Jadhav University to be a part of the design team. It also promises
direct and indirect employment in and around the area of the manufacturing plant and also better
community facilities. But another aspect to this is the picketing of the plant in Singur by angry
farmers who felt they were being vacated from their lands unlawfully. This lead to the closure of
the Singur facility and the whole Tata Nano plant being moved 'lock stock and barrel' to Sanand in
Gujrat, India.

We can clearly see that in Systems of innovation approach, innovations are not only determined by the
elements of the network themselves but also by the relationships that exist between the different elements
of the system. These relationships are complex and are distinctive due to the presence of reciprocity,
interactivity and feedback mechanisms. Hence the low price of the car can only be achieved if the design
team, the suppliers, distributors, government, universities and local people all work in tandem at various
levels towards this objective. The complexity of the relationships can also be considered as a challenge
because when the project and the place of production are new, there is not enough information about the
exact nature of these relationships. The interdependency and connectivity between the elements of the
network has to be captured through empirical work which is not an easy task as it involves research into
various parameters. (Edquist,2005)
Q2: Using secondary, published and references data sources, discuss a particular innovation that has
occurred in this organisation.
After the severe financial meltdown the automobile sector has faced from the past two years it has become
very clear that big, gas guzzling, large engine vehicles will not sell. This can be attributed to the lower
disposable incomes, rise in fuel prices all over the world and stricter emission policies being adopted by
most countries. PwC predicts that over the next five years the production of small cars will increase by
about 50%. Since the margins on the sale of small cars are much lower the auto companies will have to
sell much more in order to be profitable. (Webb, 2010) The Tata Nano goes even further. Using the bottom
of the Pyramid approach (Prahalad & Hammond, 2002) it is targeting a whole new market of motorcycle
users who would be interested in shifting to a Nano as it comes with a price tag of around $2500 which is
slightly more than the price of a motorcycle but almost half the price of the Maruti Suzuki 800 which
h is the next cheapest car in the market. To be able to be profitable after accounting for raw material costs,
labour and other overheads the Nano has to sell in large volumes. To be able to handle such large volumes
there has to be a cheap and a robust supply chain mechanism in place.
The Tata Nano with its One Lakh Rupees price tag is not just a product of technological innovation but
also innovation in terms of supply chain and networks.
The major innovative aspects of the Nano's supply chain are:

Target pricing
3Ps Initiative-Production, Preparation and Process Methodology

Localised single source suppliers

Vendor parks

The Tata group subsidiaries

Distribution of Nano car kits to the dealers

Target Pricing: The process of target pricing attempts to determine the features and functions that should
be provided in the car at a price the customer is willing to pay. Once the functions and features are
finalised target costs are allocated to each and every component or system. The design teams relay the
function required and the target cost of the components to the suppliers who then come up with suitable
designs and production methods to suit the requirement within the specified cost. The suppliers where
involved in the early stages of design of the Nano through the 3Ps initiative - where the suppliers inputs
in the Production, Preparation and Process methodology were considered and incorporated in the final
design.In this case the design team looked at every bolt and nut to keep the cost down without affecting
the functionality. For example the Nano has instrument clusters which did not use screws for fixing and
did not have an anti-glare coating.
Localised single source suppliers: Established suppliers like Bosch where roped in for Proprietary design
components like engine management systems and spark plugs. Bosch used local design capabilities by
splitting the development between its Bangalore and Germany design centres. This was a crucial decision
as it helped to use local talent and keep the costs low.For in-house designed components and systems, Tata
Motors picked suppliers with strong process capabilities who could provide input and valuable suggestion
on the designs. It was important to screen the suppliers at an earlier stage itself since the suppliers had a
greater role to play not just in the design and development process, but also the purchasing. About 75% of
the components are being single sourced and about 90% of the total car is being outsourced to local
vendors and suppliers. (SupplierBusiness.com)
Vendor Parks: The supplier selection process was highly selective for the Tata Nano. Ariba.Inc a leading
provider of on-demand spend management solution providers where pressed into service. (Kumarswamy,
2009) Out of the 1000 invitations that were send out only 100 suppliers were selected based on their
capabilities to deliver the required high volumes to the required quality levels. The expertise and
knowledge levels were also considered during the selection process. Half of the 100 vendors for the
project are co-locating with the mother plant at Sanand, Gujrat in a 350-acre vendor park. This was
achieved by convincing the suppliers of the volumes by offering volume contracts instead of annual
contracts which in turn helped drive the cost further down. Another aspect of having these vendor parks is
the ability to share knowledge and problem solving capability. There is problem solving team at Tata Nano
which goes to the vendor sites and provides technical know-how and expert opinion thereby reducing the
need to hire expensive technical experts for the individual vendors. For example all of Tata Nano's tubular
structures are generated through Hydro-forming which results in weight reductions and simpler production
process. It also uses roll-forming instead of stamping which allows a common tooling for a number of
parts leading to fewer operations and hence better productivity.
The Tata group subsidiaries: Tata Motors have made great use of the subsidiaries that exist under the
Tata umbrella to achieve the target cost of Nano. Subsidiaries include Tata Steel for chassis and some nonload bearing components of the vehicle (www.tatasteel.com), Tata Auto Comp Systems (TACO) for onboard computer systems (www.tacogroup.com) and HV Axles Limited for the axles. (www.hvaxles.com)

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