Nike's Sweatshop Problem: A History And Its Impact On Brand Image, An Essay.

Discuss about the Organizational Behavior, The company operated under the name “Blue Ribbon Shoes” for almost a decade and then started to design their own running shoes.

Outsourcing is the activity of contracting out certain functions or operations of a business to external suppliers, it involves transfer of people, process and assets (Deloitte, 2013)

In 1989 Peter Drucker, ace management thinker explained the concept of outsourcing in an article in Wall Street Journal entitled “Sell the Mailroom”. Drucker coined the phrase "Do what you do best and outsource the rest" following this as a strategy Nike has always concentrated its attention on designing and promoting its products and has outsourced almost all its manufacturing to the countries of China, Vietnam  and Indonesia. During 90’s Nike was accused of selling products manufactured at sweatshops. There were mass protests and boycotts which led to drop in revenues of Nike.

Phill Knight, co-founder of Nike Inc. developed a business model during his days at Stanford University. According to this model, if cheap Japanese Labour could be used to make running shoes the final product will be cheaper from the competitors and of better quality as well. Initially the company imported athletic shoes from Japanese manufacturer Onitsuka Tiger Co. and sold them in US markets at premium. The company operated under the name “Blue Ribbon Shoes” for almost a decade and then started to design their own running shoes. In 1972, Blue Ribbon Shoes rebranded itself as Nike Inc. (www.entrepreneur.com, 2008). In 1977 Nike started to outsource its manufacturing to Taiwan and South Korea and in their facilities in Maine and New Hampshire the manufactured almost 15% of total. But by 1984 they shut both their facilities in US due to high labour costs and completely outsourced their manufacturing to Asian countries.

Nike shifted their manufacturing to factories in China, Vietnam and Indonesia when the cost of labour in Taiwan and Korea surged up. In 1991, Jeff Ballinger published his report on working conditions at Nike’s factories in Indonesia.  Reports highlighted that Nike’s contractors paid 14 cents per hour to workers which below minimum wages in Indonesia. It was also reported that workers were subjected to physical and verbal abuses if they underperformed. Jeff’s report was covered and broadcasted by Thames TV, Knight Rider and The Economist. In 1992 Barcelona Olympics customers staged protests against Nike and started to boycott its products, this led to decline in sales (2013) 

In July, this year, Students and activists participated in a day long protests against Nike in the cities of Boston, Washington D.C., Bangalore and San Pedro Sula in Honduras. These protests were done in response to the report generated by Worker Rights Consortium (WRC) in December 2016 after inspecting Nike’s production facility at Hansae, Vietnam. WRC is a monitoring organisation formed in year 2000 by Student groups, Universities and labor rights experts. WRC accused Nike of wage theft, verbal abuse and numerous other health and safety violation at their factory located in Hansae. Nike was also accused of stopping production at their factory in Honduras, hence leaving the workers jobless. Nike, however, claims that it has to withdraw production because Canadian Apparel manufacturer Gildan forced it to do so (Bain, 2017). These allegations on Nike are not new. In 1990’s Nike faced mass criticism for selling products manufactured at sweatshops. In this report we have revisited what happened when Nike was first accused of Child Labor and sweatshops and why, after addressing the issue multiple times since then, Nike has come in spotlight due to similar allegations.

How the problems of sweatshop surfaced

"To bring inspiration and innovation to every athlete* in the world." (help-en-us.nike.com, 2017)

Nike Inc. is an American Multinational Corporation found jointly by Bill Bowerman and Phil Knight in the year 1964.  Nike primarily designs, develops and markets athletic footwear, equipment, accessories and apparel. They offer products in various categories like Running, Football, action sports, golf, Men's and women’s Training. Nike also markets products for kids and for activities like cricket, walking, wrestling, tennis, volleyball and other outdoor activities. Adidas, V.F. Corp., Puma, Li Ning, and Under Armour are some of Nike’s major competitors (csimarket.com, 2017)

Bill Bowerman and Phil Knight incorporated Nike on January 25, 1964, and was called Blue Ribbon Shoes. It was incorporated near the city of Beaverton, Oregon where it is headquartered today. Blue Ribbon Shoes used to import shoes from Japan and sell them locally. On May 30, 1971, it came to be officially known as Nike. Greek Goddess of victory, Nike, was the inspiration behind its nomenclature.

Various equipment and accessories are sold under Nike brand. They also supply plastic products to other manufacturers through their subsidiary called Nike IHM Inc. Under their brand Jordan, they design, distribute and License apparel, footwear and accessories relating to basketball. Two more wholly owned subsidiaries are Hurley and Converse, headquartered in Costa Mesa and Boston respectively, design and distribute lifestyle apparel, accessories and casual sneakers for youth. 

Nike’s Direct to customers operation include sale of their products through Niketown (Nike owned retail stores), e-Commerce websites and mobile applications, apart from these Nike also sell through independent distributors and licensees worldwide. Nike has outsourced its footwear manufacturing completely to, approximately, 127 factories spread across 15 countries. In the fiscal year of 2017 countries of Vietnam, China and Indonesia manufactured 94% of total footwear produced. Similarly, apparels are supplied by approximately 363 factories located in 37 countries. Nike employed 74,400 employees worldwide as of 31 May 2017 (Nike, 2017)

Conclusion after initial review

After going through Nike’s Business Model it is quite clear that Nike’s core Competency is designing innovative products and advertising. It is in these two areas that its major expenditure is done on. Nike has outsourced all its manufacturing to Asian countries. With all the money saved by outsourcing Nike is able to finance its extensive Advertising and Branding activities which involve celebrity endorsements, University Tie ups and sponsorships to Inter University sports events. Since Nike completely turned its back towards the way sub-contractors are treating the workers, Nike faced flake for its unregulated labor practices at its factories.

After labor practices at Nike’s factories in Asia came in light in early 1990’s Nike faced lot of criticism from all sections of society. Nike was criticized for selling products sourced from countries with low wages, poor working conditions and wide spread human rights problem. Nike was also accused of taking away jobs from US textile workers. Subsequently, due to these allegations Nike witnessed a drop in its sales. There were demonstrations against Nike by customers and students groups. Nike, which had established itself as leading Brand of sports and related products suddenly found itself amongst debate relating to sweatshops and child labor. It was a major setback to its image. In May 1998, Phil Knight said in his speech that “the Nike product has become synonymous with slave wages, forced overtime, and arbitrary abuse” (Locke R. M., 2002).  In the same year, as a result of unrelenting criticism and weak demand Nike had to lay off some of its employees.

Nike: Sweatshops

Nike focused completely on what they knew best i.e. designing and marketing. But, the mistake that Nike committed was turning its back on how the outsourcing is being carried out by the sub-contractors. Initially when Nike was accused of its labor practices they shrugged off the accusations by saying that Nike is not responsible for the work conditions at the contracted factories. This further augmented their image of socially irresponsible organisation hence affecting the brand negatively (Donado).

The initial reaction of Nike managers on the reports showing condition of Indonesian factory workers was to ignore the criticism and thereafter, when more such incidents in other Asian factories started to surface they concentrated their attention on branding and promotion activities even more. Behaviour demonstrated by Nike initially is an example of Corporate Complacency. Outsourcing the business operations at which Nike had no expertise in was a good business decision but it made rest of the organisation indifferent to their responsibility towards the welfare of workers at Asian factories and the effect it can have over Brand image (Mourdoukoutas, 2011)

Following Articles were studied to gain better knowledge about the issue:

This paper talked about how Nike has both benefitted and faced criticism because of Globalisation and its outsourcing policies (Locke R. M., 2002).

• Globalization has opened a world of opportunities for Multinational Corporation but due to lack of clear and agreed upon definition of Global corporate citizenship these organisations find themselves amongst varied reactions which their strategies might generate both at home and abroad.  
• In order to generate profit margins by outsourcing Nike completely overlooked its Corporate and social responsibilities. Business model of Nike allowed it to globally source and produce products at fraction of the cost they would have incurred in their own country. The profits they reaped were invested in advertising and product design.
• In the process of developing and maintaining its Brand image Nike completely forgot to take notice of the facilities where its production was taking place. Almost all of these facilities, which were primarily located in Asia, were plagued with the problems of verbal and physical abuse, low wages, poor working conditions and human right issues.
• In early 1990’s, reports about underpaid labourers in Indonesian factories, child labour in Pakistan and Cambodia and poor working conditions in factories at China and Vietnam started to surface, making Nike poster child of anti-globalisation movement.
• At, first the managers at Nike ignored the criticism and countered it by saying that they are not responsible for the conditions of workers employed by sub-contractors. But beginning from 1991 Nike took a number of steps to regulate working conditions at contracted factories.

Does Monitoring Improve Labor Standards: Lessons from Nike (Locke, Qin, & Brause, 2006)

In this paper authors have discussed Monitoring efforts done by Nike to ensure Code of conduct is implemented and how efficient are they. Following are the major findings:

• Monitoring efforts combined with interventions focusing on solutions for root causes of poor working conditions, for example, by developing better schedules of work which might improve the quality and efficiency, the working conditions will surely improve.
• Internal audits can be biased as they are carried out by the organisation. The chances of hiding certain information for their benefit are high, on the other hand third party audits like those done by NGOs also cannot be considered credible as they lack technical knowhow.
• To enforce the code of conduct Nike trained its suppliers and appointed a team of 90 as compliance staff in 21 countries to monitor suppliers.
• All suppliers undergo 3 types of Audits SHAPE (safety, health and environmental audit), M-Audit (detailed management audit) and periodic inspections by FLA.
• The variation in working conditions across the factories is found due to country related effects, characteristics of particular factory and relationship between Nike and the particular supplier.

Conclusion

After ignoring the criticism it faced initially Nike, in May 1998, Nike’s Co-founder Phil Knight accepted in a press conference that Nike products are being associated with child labor, low wages, physical abuse and poor working conditions. Nike accepted that its outsourcing strategy has failed and this gesture being honest and transparent about the labor issues it faced earned Nike the credibility it was losing amongst its customers. Nike then introduced a series of reforms to improve the situations at their Asian Factories. Some of them were applauded and welcomed by human right activists and some were criticised on various grounds. Following are the various measures taken:

• Nike developed a comprehensive Code of conduct for its Factories.  This code of conduct helped Nike in reinforcing accountability and transparency in its operations along with establishing and protecting workers’ rights.  Although this code of conduct was criticized for not being enforced fully. The incident of Bangladesh Factory collapse, where the death toll was of around 700, would have been avoided if code of conduct was strictly followed at these factories(Bolle, 2014)
• By 2001, toxic solvent based cleaners and glues were replaced with water based glues which are used to manufacture 95% of Nike shoes.
• Nike tasked former US ambassador to UN Andrew Young to carry out inspection of its factories located abroad. However his reports were criticized because he did not addressed the issue of low wages. Furthermore, he was accompanied by Nike’s official during his tour and Interpreters to translate were also appointed by Nike. These factors largely influenced the credibility of his reports(Nisen, 2013). Nisen 2013
• In 1999, Nike joined Fair labor association, which is a non-profit group formed by various universities, businesses and human activists.  Main objective of FLA in to monitor if organisations are following the code of conduct ensuring minimum wage, working hours of 60 per week and minimum age. FLA is criticized on its take on paying minimum wages as per government norms instead of a living wage. In some developing countries minimum wages are kept lower than the living wage to attract foreign investment (Beder, 2002).
• In 2005 Nike became first organisation to provide a list of all its factories in a 108 pages report where it revealed the conditions and pays in its factories and admitted widespread issues especially in South Asian countries. Nike has continued this practice of publishing a corporate social responsibility report every year(Teather, 2005)
• Other measures were ensuring air conditions as per OSHA, increasing minimum age of workers to 16 and 18 for manufacturing apparel and shoes respectively.

Learning outcomes and Conclusion

Nike is an example of how globalisation can adversely affect the image of an organisation if its benefits are not reaped in a regulated manner. Nike was not able to foresee the adverse effects unethical labor practices at factories can have over its image. Minimum wages, health and safety norms and child labor laws should be taken in consideration while outsourcing.  Although Nike took many steps to mitigate the effect of sweatshop allegations but the recent event at Hansae factory (Stuer, 2017) has again raised questions on how well was Nike able to clear its image after all these years.

An efficient outsourcing plan should be responsive to changing business priorities by keeping the costs in control. In such situations globalisation proves to be a boon. Organisations can outsource beyond the national boundaries. But it is important for every organisation to understand its role as Corporate Citizen and assume the responsibility of providing better working conditions for employees both at parent company and at contractors’ facility.   

Secondly, outsourcing should be accompanied with technical and organisational support to contractors for tackling problems relating to non-compliance with workplace norms of Parent company (Guthrie, 2012).

Finally, a detailed ethical code of conduct should be developed and all the employees of the organisation should be sensitized about it. Today the corporate image of an organization is not discounted from its CSR.

(2008). Retrieved December 16 , 2017, from www.entrepreneur.com: https://www.entrepreneur.com/article/197534

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(2017). Retrieved December 15, 2017, from help-en-us.nike.com: https://help-en-us.nike.com/app/answer/a_id/113

(2017). Retrieved December 15, 2017, from csimarket.com: https://csimarket.com/stocks/compet_glance.php?code=NKE

Bain, M. (2017). Nike is facing a new wave of anti-sweatshop protests. Retrieved December 18, 2017, from www.qz.com: https://qz.com/1042298/nike-is-facing-a-new-wave-of-anti-sweatshop-protests/

Beder, S. (2002). Putting the Boot In. The Ecologist, 32(3), 24-28.

Bolle, M. J. (2014). Bangladesh Apparel Factory Collapse: Background in Brief. Congressional Research Service .

Deloitte. (2013). The Outsourcing Handbook: A guide to Outsourcing. London: Deloitte MCS Limited.

Donado, A. (n.d.). Why do they JUST DO IT? University of Heidelberg.

Guthrie, D. (2012). Building Sustainable and Ethical Supply Chains. Retrieved December 19, 2017, from www.forbes.com: https://www.forbes.com/sites/dougguthrie/2012/03/09/building-sustainable-and-ethical-supply-chains/#4f9c1ead4179

Locke, R. M. (2002). The Promise and Perils of Globalization: The case of Nike. Cambridge: Industrial Performance Center.

Locke, R., Qin, F., & Brause, A. (2006). Does Monitoring Improve Labor Standards?: Lessons from Nike . MIT Sloan School of Management .

Mourdoukoutas, P. (2011). The Unintended Consequences of Outsourcing. Retrieved December 19, 2017, from www.forbes.com: https://www.forbes.com/sites/panosmourdoukoutas/2011/12/09/the-unintended-consequences-of-outsourcing/#622bd1c37e36

Nike. (2017). Annual Report. washington D.C.

Nisen, M. (2013). How Nike Solved Its Sweatshop Problem. Retrieved December 19, 2017, from www.businessinsider.in: https://www.businessinsider.in/How-Nike-Solved-Its-Sweatshop-Problem/articleshow/21122639.cms

Stuer, K. (2017). With Nike Up to Old Tricks, Students and Workers Launch Global Protests. Retrieved December 19, 2017, from https://www.labornotes.org: https://www.labornotes.org/2017/08/nike-old-tricks-students-and-workers-launch-global-protests

Teather, D. (2005). Nike lists abuses at Asian factories. Retrieved December 19, 2017, from www.theguardian.com: https://www.theguardian.com/business/2005/apr/14/ethicalbusiness.money