Posted by: itm2011 | May 17, 2011

Nike: The Scrutinizing Outcome of Sub-Par Corporate Responsibility

Nike: The Scrutinizing Outcome of Sub-Par Corporate Responsibility

(A Case Summary by Alexandra Walz)

After reading through many case study descriptions provided by the Harvard Business School, I came across this case study dealing with Nike and their continued struggle with the media relating to the manufacturing plants the company uses to produce its goods. From the description provided, I was instantly drawn to the amount of interesting and deep content that was given in this article. Although the publication was in 2002, the relevance of this article is still very important, since labor laws and corporate responsibility continue to be issues with many very large and successful apparel manufacturing companies, with Nike being under a microscope from the media for many years.

Having taken an interest a few years back in the cruel labor conditions people have to work in in developing countries just to make the shirt that is on my back, I have periodically researched companies whom have had issues with poor labor conditions. It is quite frightening that companies with as large brand recognition as Nike would continually lie to the public about what was happening in the factories they sourced from, thinking their secrets would never get out. The massively large brand recognition that Nike has on a global level also drew me to this article because there are not many other companies such as Nike who have had as great a success and are as well known. The publicity surrounding all of the allegations about the poor labor conditions at the factories in which Nike sources were very public and right in the center of the media, but that did not stop the population at large from buying Nike products. Although there were some decreases in sales and Nike lost contracts with different college’s, a large majority of the Nike customer was loyal to the brand, choosing to ignore the very public circumstances in which the shoes on their feet or the t-shirt on their back was made. Nike has a large affect on millions and millions of people, and it is because of this I was drawn to further understand the situation described in the case study. Lastly, this article shows how much the power of a voice and protestors can affect a company, specifically the students at different universities who refused to buy Nike products from their campus stores. As an affect of the power of protestors and the press scrutiny surrounding Nike and the labor conditions in the factories, the CEO was forced to budge and finally provide a solution to the problem that had been lasting for years.

Hitting the Wall: Nike and International Labor Practices offers insight directly into the world of corporate responsibility and global management. Poor labor conditions and low wages have been an issue for many years, and are still present today in 2011. Being able to study how a globally recognized brand such as Nike dealt with years of scrutiny surrounding their labor conditions and what solution they chose provides a very real look into running a globally massive company.

Article Summary:

In the 1980s and 1990s, Nike had been plagued by a series of labor incidents and public relations nightmares: underage workers in Indonesian plants, allegations of coerced overtime in China, dangerous working conditions in Vietnam. For a while, the stories had been largely confined to labor circles and activist publications, until a young female worker had died in a Nike contracting factory in 1997, the labor conditions at Nike had hit the mainstream.

Nike, Inc. 

Based in Beaverton, Oregon, Nike had been a corporate success story for more than three decades. It was a sneaker company, but one armed with an inimitable attitude, phenomenal growth, and the apparent ability to dictate fashion trends to some of the world’s most influential consumers. Selling a combination of basic footwear and street-smart athleticism, Nike pushed its revenues from a 1972 level of $62,000 to a startling $49 million in just ten years.

What differentiated Nike from its competitors was not so much its shoes as its strategy. First, the company would shave costs by outsourcing all manufacturing. There would be no in-house contracting factories, no dedicated manufacturing lines. Then, the money saved through outsourcing would be poured into marketing. In particular, Phil Knight, CEO of Nike, focussed from the start on celebrity endorsements, using high-profile athletes to establish an invincible brand identity around the Nike name.

While the marketing of Nike’s products was based on selling a high profile fashion item to affluent Americans, the manufacture of these sneakers was based as an arms-length and often uneasy relationship with low-paid, non-American workers. Indonesia became a critical location for Nike, with six factories that supplied Nike and a booming, enthusiastic footwear industry.

Situation

At first, Indonesia seemed an ideal location for Nike. Wages were low, the workforce was docile, and an authoritarian government was yearning for foreign direct investment. In 1991, the daily minimum wage in Indonesia’s capital city was barely $1, compared to a typical daily wage of $24.40 in South Korea and a U.S. hourly wage in athletic shoe manufacturing of about $8. For Nike, this was key: shoes coming out of China and Indonesia cost roughly 50% less than those sourced from Taiwan and South Korea.

A rare wave of labor unrest swept across Indonesia, with 112 strikes in 1991, a sharp increase from the 19 reported in 1989. Some claimed the source of these strikes was the government itself, trying to convince the international community of the country’s commitment to freedom of speech and labor rights. Jeff Ballinger was a labor activist and felt passionately that any company had a significant obligation towards even its lowliest workers, with his concern about the gap between wage rates in developed and developing worlds, and the opportunities this gap created for rich Western companies to exploit low-wage labor pools. Ballinger believed that Nike’s policy of competing on the basis of cost fostered and even encouraged contractors to mistreat their workers in pursuit of unrealistic production quotas. Nike contractors, he believed, were regularly flouting Indonesian labor laws and paying below-subsistence wages that did not enable workers to meet their daily requirements for food and other necessities. Ballinger focused his research on Nike, thinking that the same marketing and branding power that drove Nike’s bottom line could also be used to drive moral outrage against the exploitation of Asian workers.

The first party to respond to criticism from Ballinger and other activist was the government, whom raised the official minimum daily wage from 2100 rupiah to 2500 rupiah in Indonesia in 1992. This new wage only provided 70% of a worker’s required minimal physical need. Nike insisted that labor conditions in its contractors’ factories were not- could not- be Nike’s concern or its responsibility. In 1992, a member of the public relations team at Nike composed a Code of Conduct and Memorandum of Understanding, which was sent to all contractors. It required its suppliers to certify they were following all rules and regulations.

Ballinger published an annotated pay-stub from an Indonesian factory in the 1992 August issue of Harper’s, making a comparison between workers’ wages and Michael Jordan’s endorsement contract, showing that it would take an Indonesian worker 44,492 years to make the equivalent of Jordan’s endorsement contract. Soon enough, the spotlight on the labor issue extended all the way to Washington. Representative George Miller launched a campaign aimed at retailers that would mandate the use of “No Sweat” labels to guarantee that no exploited or child labor had been employed in the production of a garment. In 1996, President Bill Clinton began that Apparel Industry Partnership (AIP), included members of the activist, labor, and religious communities, was meant to be a model collaboration between industry and its most outspoken critics. Nike was the first company to join.

As far as public relations were concerned, 1997 was even worse for Nike than 1996. In 1997 the company began expanding its chain of giant retail stores, only to find that each newly opened Niketown came with an instant protest rally. One of the clearest indicators that Nike was in trouble came in May 1997, when Doonesbury, the popular comic strip, devoted a full week to Nike’s labor issues. Even more trouble loomed ahead with the anticipated release of The Big One, a documentary film by Michael Moore that was widely expected to be highly critical of Nike’s labor practices.

In the public debate, the question of labor conditions was largely couched in the language of human rights. Buried beneath contentious issues, though, was an even more contentious one: wages. According to many labor activists, workers in the developing world were simply being paid too little – too little to compensate for their efforts, too little compared to the final price of the good they produced, and too little to live on. Initially, Nike sought to defuse the wage issues simply by ignoring it, or by reiterating the argument that this piece of labor situation was too far beyond their control.

The issue of wages emerged again in spring of 1997, when Nike arranged for students at Dartmouth’s Amos Tuck School of Business to conduct a detailed survey on “the suitability of wages and benefits paid to its Vietnamese and Indonesian contract factory workers”, which was completed in November 1997.  In one Indonesian household the students visited, a family of six had used one daughter’s minimum wage from a Nike factory to purchase luxury items such as leather couches and a king sized bed. The authors found that Indonesians typically put their wages in a bank. Economically, data such as these supported the view that companies such as Nike were actually progress in the developing countries, providing jobs and wages to people who formerly had neither. In the public view, the average worker in a Vietnamese Nike factory made about $1.67 per day. A pair of Nike basketball sneakers retailed for $150. The criticism continued to mount.

Until the spring of 1997, Nike sneakers were still selling like hotcakes, despite the storm of criticism lobbied against it, Nike seemed invincible. A year later, Nike’s fiscal year 1998 produced considerable pain. Earnings fell 69%, the company’s first loss in 13 years. In response, Phil Knight, CEO of Nike, announced significant restructuring changes and the layoff of 1,600 workers. Along with a decrease in revenue, anti-Nike headlines had trickled down to the nation’s campuses, where a newly invigorated activist movement cast Nike as a symbol of corporate greed and exploitation. Campus activists rejected Nike’s contracts with their schools and demanded all contracts cease until labor practices were rectified. In 1999, activists took over buildings at Duke, Georgetown, the University of Michigan, and the University of Wisconsin, and staged sit-ins at countless other colleges. University administrators heeded the student protests, and many began to consider codes of conduct for contract manufacturers.

Saving Nike

In a May 1998 speech to the National Press Club, CEO Phil Knight announced a series of sweeping reforms, including raising the minimum age of all sneaker workers to 18 and apparel workers to 16; adopting the U.S. OSHA clean air standards in all its factories, expanding its monitoring program; expanding educational programs for workers; and making micro loans available to workers. Knight’s confession marked a turning point in Nike’s stance towards its critics. For the first time, he and his company appeared ready to shed their defensive stance, admit labor violations did occur in Nike factories, and refashion themselves in the effort to reform third world working conditions.
Nike’s second step was to get more involved with Washington-based reform efforts. The Fair Labor Association (FLA) was to be a private entity controlled evenly by corporate members and human rights or labor representatives. It would support a code of conduct that required its members to pay workers the legal minimum wage or the prevailing local standard, whichever was higher. The minimum age of workers was set at 15, and employees could not be required to work more than 60 hours per week. Nike worked tirelessly to bring other manufacturers into the FLA, but the going was though. Nike’s efforts to foster the FLA hit pay dirt with U.S. colleges and universities, with over 100 colleges and universities signing on.

By 1999, Nike was running extensive training programs for its contractors’ factory managers. Although Nike’s various concessions and new programs were welcomed as a victory by several human rights groups, others argued that Nike still failed to deal with the biggest problem, namely wages. A main objection of critics was that FLA standards included notification of factories that were to be inspected, a move criticized by some as equivalent to notifying a restaurant when a critic is coming to dine. Ballinger was confident that Nike had at least removed dangerous chemicals from factories, but otherwise he remained skeptical: “ If you present yourself as a fitness company you can’t very well go around the globe poisoning people. But on wages, they’re still lying through their teeth.”

Nike Post 2002:

Since the continual downfalls Nike has experienced with the media involving the factories they source from, Nike has constructed a program to deal with the labor issues that have been reoccurring in the more than 900 supplier factories they use. These factories span across some 50 countries, all sourcing Nike goods. A staff of 97 employees inspects several hundred factories a year, giving each factory a grade on labor standards and works closely with the factory manager to improve problems. Along with having their own inspectors, Nike now allows random factory inspections by the Fair Labor Association (FLA), a monitoring outfit founded by human rights groups and companies such as Nike, Reebok, and Liza Claiborne.

Because Nike is now far more public with their sourcing issues, when human rights groups or student protestors find a problem with the company factory being used, they now deal with Nike directly, rather than going straight to public demonstrations and calls of help. Since building up its in-house monitoring staff in 2002, Nike has performed more than 600 factory audits by September 2004, including repeat visits to those factories with the most problems.

Although Nike has been working hard to fix the issue of poor labor conditions in the factories they source from, the difficult issue of low wages and unionization has be little addressed. Nike and other companies have made progress improving factory conditions and closely inspecting factories, but things like underpayment of wages and freedom of association are being looked past.

Stated in the Nike’s 2010 Corporate Responsibility Report, labor and human rights continue to be a top priority and corporate worry. Nike expresses that monitoring the contracts of some 600 factories for working conditions, wages and overtime- and a host of other issues, is not easy. Challenging issues remain ahead for the company and even the industry. Nike has realized if they want to make sustainable improvements for workers, they need to significantly chance the way engagement and interaction among the supply chain is had as a whole.

Nike is collaborating with other brands on factory audits and working with competitors on developing remedies for labor problems as well as standardized codes. Also, Nike has the opportunity to reduce the pressure of asking factories to manufacture too many styles, by reducing the number of apparel styles and partnering with the factories to improve efficiencies through lean production methods.

Critique:

“Hitting the Wall: Nike and International Labor Practices” by Debora L. Spar provided a very interesting and rather controversial look into the media buzz that has been surrounding Nike and the labor conditions/wages being received in the many factories the company sources from.  Although I have previously heard about the poor conditions in factories that Nikes uses, I did not know how long these issues have been going on for and how many different activists have continually targeted Nike, whether it be activist in Washington, D.C. or students on a college campus who refuse to buy products manufactured in poor conditions for the laborers. The content of this article was continually interesting throughout, with an easily understandable and intriguing flow of information that covered more than seven years.

Because Nike is one of the largest globally recognized retail/athletic based product companies in the world, with a brand recognition by multiple different icons ( the Nike swoosh, “Just Do It”, Air Jordan), this article provided me with a better understanding of what goes on in such a large corporate company. The importance of corporate responsibility is far greater than I had previously known, and it was interesting to see Nike’s shift from saying it was not their place to be involved in the factory conditions in the early 1990s to taking responsibility for their actions and doing something about the conditions in the late 1990s. Studying Nike was very enjoyable and familiar because I have been a loyal Nike customer since I was a child, not knowing then that the shoes on my feet could have been made by an underage teenage girl working for far less than minimum wage.

In today’s society, I believe is a much larger microscope on corporate companies and the factories they source from, especially Nike due to their previous track record. Although there are many more tools to make sure labor laws are met and organizations to prevent workers from being paid less than minimum wage, one never knows who is lying and who is being truthful. Overall, studying this article was very informative and enjoyable, and encouraged me to continue researching labor laws in factories around the world, especially Nike.

Works Cited:

Bernstein, Aaron. “Nike’s New Game Plan for Sweatshops.” Bloomberg Businessweek 04 09 2004: n. pag. Web. 16 May 2011. <http://www.businessweek.com/magazine/content/04_38/b3900011_mz001.htm>.

Connor, Michael. “Nike: Corporate Responsibility at a “Tipping Point”.” Business Ethics 01 24 2010: n. pag. Web. 16 May 2011. <http://business-ethics.com/2010/01/24/2154-nike-corporate-responsibility-at-a-tipping-point/>.

Spar, Debora. “Hitting the Wall: Nike and International Labor Practices.” Harvard Business School: Case Study (2002): n. pag. Web. 16 May 2011.


Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: