c
 c


ON
 

  
 
OF
  

 

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:-
MS. VANDANA GUPTA


:-
NEERAJ AGRAWAL [309D19]
SUMIT RATNANI [309D25]
ADITYA BHATIA [309D36]
RAVI PRAKASH [309D34]
SANKET KHURANA [309D57]
KARAN CHAUDHARY [309D12]

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Acknowledging the debt is not easy for us as we are indebted to so
many people. We take this opportunity in expressing the fact that
this project report is the result of incredible amount of
encouragement, co-operation, will to help and moral support we
received from others.

We acknowledge our sincere gratitude to our faculty Ms. Vandana

Gupta for her valuable guidelines, inspiration and support
throughout the course of study.

We are also thankful to Distributor of Nestlé for helping us in

getting information from various sources. We will fail in our duty if
we forget to express our gratitude to well wishers, family and
friends who have given emotional and intellectual support to us.

We must not also fail to acknowledge the help of those numerous

Nestlé·s Wholesaler and Retailers who spent a part of their busy
schedule in being a part of our survey.

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This is to certify that Project Report entitled MANAGING CHANNEL

CONFLICTS OF NESTLÉ is submitted by below mentioned group is
a genuine work and the matter embodied in the project is original to
the best of our knowledge. The matter embodied in the project work
has not been submitted for the award of any other degree, diploma
or any other similar title or prizes to the best of our knowledge and
belief.

NEERAJ AGRAWAL [309D19]

SUMIT RATNANI [309D25]
ADITYA BHATIA [309D36]
RAVI PRAKASH [309D34]
SANKET KHURANA [309D57]
KARAN CHAUDHARY [309D12]

PLACE: NOIDA
DATE: 10TH FEBRUARY· 2010.

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Nestlé was founded in 1866 by Henri Nestlé and is today the world's
biggest food and beverage company. Sales at the end of 2005 were
CHF 91 bn, with a net profit of CHF 8 bn. Nestlé employ around
250,000 people from more than 70 countries and have factories or
operations in almost every country in the world.

The history of Nestlé began in Switzerland in 1867 when Henri

Nestlé, the pharmacist, launched his product Farine Lactée Nestlé,
a nutritious gruel for children. Henri used his surname, which
means ·little nest·, in both the company name and the logotype. The
nest, which symbolizes security, family and nourishment, still plays
a central role in Nestlé·s profile.

Since it began over 130 years ago, Nestlé·s success with product
innovations and business acquisitions has turned it into the largest
Food Company in the world. As the years have passed, the Nestlé
family has grown to include chocolates, soups, coffee, cereals,
frozen products, yoghurts, mineral water and other food products.
Beginning in the 70s, Nestlé has continued to expand its product
portfolio to include pet foods, pharmaceutical products and
cosmetics too.

Today, Nestlé markets a great number of products, all with one

thing in common: the high quality for which Nestlé has become
renowned throughout the world The Company's strategy is guided
by several fundamental principles. Nestlé's existing products grow
through innovation and renovation while maintaining a balance in
geographic activities and product lines. Long-term potential is never
sacrificed for short term performance. The Company's priority is to
bring the best and most relevant products to people, wherever they
are, whatever their needs, throughout their lives.

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

That's not to say that every operating company can do as it wishes.

Headquarters in Vevey sets the overall strategy and ensures that it
is carried out. It's an approach that is best summed up as:
'centralize what you must, decentralize what you can'. Nestlé is a
company which is present in all over the world but it has difference
and unique motto to deal in all over the world. Nestlé believes that
they should think about their organizations globally but they deal
with people by interacting with them locally.

´ 


 

 

 


   

Nestlé India is a subsidiary of Nestlé S.A. of Switzerland. With seven

factories and a large number of co-packers, Nestlé India is a vibrant
Company that provides consumers in India with products of global
standards and is committed to long-term sustainable growth and
shareholder satisfaction.

The Company insists on honesty, integrity and fairness in all

aspects of its business and expects the same in its relationships.
This has earned it the trust and respect of every strata of society
that it comes in contact with and is acknowledged amongst India's
'Most Respected Companies' and amongst the 'Top Wealth Creators
of India'.


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Nestlé·s relationship with India dates back to 1912, when it began
trading as The Nestlé Anglo-Swiss Condensed Milk Company
(Export) Limited, importing and selling finished products in the
Indian market.

After India·s independence in 1947, the economic policies of the

Indian Government emphasized the need for local production.
Nestlé responded to India·s aspirations by forming a company in
India and set up its first factory in 1961 at Moga, Punjab, where the
Government wanted Nestlé to develop the milk economy. Progress
in Moga required the introduction of Nestlé·s Agricultural Services
to educate advice and help the farmer in a variety of aspects. From
increasing the milk yield of their cows through improved dairy
farming methods, to irrigation, scientific crop management
practices and helping with the procurement of bank loans. Nestlé
set up milk collection centers that would not only ensure prompt
collection and pay fair prices, but also instill amongst the
community, a confidence in the dairy business. Progress involved
the creation of prosperity on an on-going and sustainable basis that
has resulted in not just the transformation of Moga into a
prosperous and vibrant milk district today, but a thriving hub of
industrial activity, as well. For more on Nestlé Agricultural
Services,

Nestlé has been a partner in India's growth for over nine decades
now and has built a very special relationship of trust and
commitment with the people of India. The Company's activities in
India have facilitated direct and indirect employment and provides
livelihood to about one million people including farmers, suppliers
of packaging materials, services and other goods.

The Company continuously focuses its efforts to better understand

the changing lifestyles of India and anticipate consumer needs in
order to provide Taste, Nutrition, Health and Wellness through its

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product offerings. The culture of innovation and renovation within
the Company and access to the Nestlé Group's proprietary
technology/Brands expertise and the extensive centralized Research
and Development facilities gives it a distinct advantage in these
efforts. It helps the Company to create value that can be sustained
over the long term by offering consumers a wide variety of high
quality, safe food products at affordable prices.

Nestlé India manufactures products of truly international quality

under internationally famous brand names such as NESCAFÉ,
MAGGI, MILKYBAR, MILO, KIT KAT, BAR-ONE, MILKMAID and
NESTEA and in recent years the Company has also introduced
products of daily consumption and use such as NESTLÉ Milk,
NESTLÉ SLIM Milk, NESTLÉ Fresh 'n' Natural Dahi and NESTLÉ
Jeera Raita.

Nestlé India is a responsible organization and facilitates initiatives

that help to improve the quality of life in the communities where it
operates.


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After nearly a century-old association with the country, today,

Nestlé India has presence across India with 7 manufacturing
facilities and 4 branch offices spread across the region.

Nestlé India·s first production facility, set up in 1961 at Moga

(Punjab), was followed soon after by its second plant, set up at
Choladi (Tamil Nadu), in 1967. Consequently, Nestlé India set up
factories in Nanjangud (Karnataka), in 1989, and Samalkha
(Haryana), in 1993. This was succeeded by the commissioning of
two more factories - at Ponda and Bicholim, Goa, in 1995 and 1997

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respectively. The seventh factory was set up at Pantnagar,
Uttarakhand, in 2006.

The 4 branch offices in the country help facilitate the sales and
marketing of its products. They are in Delhi, Mumbai, Chennai and
Kolkata. The Nestlé India head office is located in Gurgaon,
Haryana.




 !"#$% $&$#
Nestlé House
Jacaranda Marg,
'M' Block, DLF City, Phase II,
Gurgaon - 122002 (Haryana).
Tel.: 0124 ² 2389400.


 


 !"#$% $&$#

M-5A, Connaught Circus,
New Delhi ² 110001.
Tel.: 011- 41514444.

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'()* Henri Nestlé founded the company in Vevey, Switzerland.

'(+( Nestlé purchases its first factory outside of Switzerland -

Viking Milk factory in Norway.

'+,- Nestlé merges with Anglo-Swiss Condensed Milk Company.

'+.+ Nestlé merges with Peter-Cailler-Kohler Chocolates Suisses

S.A.

'+/( Nestlé launches Nescafé - the world·s first instant coffee.

'+0* Nestlé merges with Alimentana S.A. with the brand Maggi.

'+). Nestlé purchases Findus.

'+*0 Nestlé becomes a significant shareholder in the Cosmetics

Company L·Oréal.

'+** Nestlé purchases Alcon, manufacturer of eye care products

and kits.

'+(- Nestlé purchases the Food Company Carnation.

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'+(( Nestlé purchases the confectionary company Rowntree
Mackintosh and the pasta company Buitoni-Perugina.

'++. Nestlé purchases the mineral water Company Perrier.

'++( Nestlé purchases Spillers pet foods business.

.,,, Nestlé sells the Findus brand in all countries except for
Switzerland.

.,,' Nestlé merges with Ralston Purina, the premier pet food
company in North America, and with unique expertise in the dry
dog food area.



  

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

healthy life for consumers everywhere. This implies gaining a deeper
understanding in many areas of nutrition and food research and
transforming the scientific advances into applications for the
company.

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

Nestlé·s aim is to meet the various needs of the consumer every day
by marketing and selling food of a consistently high quality.

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The confidences that consumers have in our brands is a result of
our company·s many years of knowledge in marketing, research and
development, as well as continuity - consumers relate to this and
feel they can trust our products.


1  




Our objectives are to deliver the very best quality in everything we

do, from primary produce, choice of suppliers and transport, to
recipes and packaging materials. Our operations and collaboration
in the Nordic countries gives us greater opportunities to be efficient
and strategic and to function well as an organization, both when it
comes to the distribution chain and to concentrating on joint
product launches and campaigns.



2 3

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

business and direct contact with trade. Our website is a forum for
consumers, students, future employees and the media. We hope
that through a sincere approach and by conducting dialogues, we
will be able to improve, change and satisfy the demands and wishes
of the people of today.

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     4

566 Nescafé, Taster·s Choice, Ricoré, Ricoffy, Nespresso, Bonka,

Zoégas, Loumidis.

%7 Nestlé Pure Life, Nestlé Aquarel, Perrier, Vittel, Contrex,

S.Pellegrino, Acqua Panna, Levissima, Arrowhead, Poland Spring,
Deer Park, Ozarka, Hépar, Ice Mountain, Zephyrhills.

879:7%; Nestea, Nesquik, Nescau, Milo, Carnation, Libby·s,

Caro, Nestomalt, Nestlé.

8 6%9  Nestlé, Nido, Nespray, Ninho, Carnation, Milkmaid, La

Lechera, Moça, Klim, Gloria, Svelty, Molico, Nestlé Omega Plus,
Bear Brand, Coffee-Mate, milk pak, yougart.

8$ # Nestlé, Sveltesse, La Laitière, La Lechera, Ski, Yoco, Svelty,

Molico, LC1, Chiquitin.

< <7%& Nestlé, Antica Gelateria del Corso, Dreyer's/Edy's,

Drumstick/Extrême, Maxibon/Tandem, Mega, Mövenpick, Sin
Parar/Sem Parar/Non Stop.

"6%" "=7$$5" Nestlé, Nan, Lactogen, Beba, Nestogen, Cerelac,

Neslac, Nestum, Guigoz, Good Start.

c7657&%"<"=7$$5" PowerBar, Pria, Musashi.

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% 8%7"=7$$5" Nutren, Clinutren, Peptamen, Modulen.

Bouillons, soups, seasonings, pasta, sauces, Maggi, Buitoni,

Thomy, Winiary, Torchin.

75>" 655# Stouffer·s, Lean Cuisine, Hot Pockets, Buitoni, and

Maggi.

67$;7%#?75#=< Nestlé, Buitoni, Herta, and Toll House.

85<5 % %"# 9$<=$ Nestlé, Crunch, Cailler, Galak/Milkybar,

Kit Kat, Smarties, Butterfinger, Aero, Polo.

5&$< Biotherm, Body Shop, Cosmence, Garnier, Helena

Rubenstein, Innéov, La Roche-Posay, Lancôme, L'Oreal, Matrix,
Maybe line, Metamorphosis, Plenitude, Red ken.

c655# Arthur's, Bakers, BETA, Bonio, Felix, Friskies Go-Cat, Go-

dog, Pro Plan, Purina, Spiller's Winalot.

7%  Cheerios & Honey Nut Cheerios, Cinnamon and Golden

Grahams ,Clusters, Cookie Crisp Shreddies, Fibre 1, Fitnesse,
Force Flakes Fruitful, Golden Nuggets, Nesquik cereal Shredded
Wheat including: Bite size, Fruitful, Honey Nut, Shred dies: Coco
and frosted.

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MANUFACTURER

CARRIAGE & FORWARDER AGENT

DISTRIBUTOR SUPER - STOCKIST

WHOLESALER RETAILER RE - DISTRIBUTER

RETAILER

Distribution plays important role in success and failure of any

organization. The organization may fail, if its distribution networks
are not efficient and unable to provide the necessary items at
required place and at reasonable time.

Distribution system of Nestlé is one of major source of competitive

edge over its existing rivals. Nestlé has its own distribution
networks equipped with all necessary transportation facilities. They
transport their products at major regional sales offices, which are
situated at different cities of India. These sales offices (distribution
centers) have their own vans with sales people who sell and
transport goods to the small retailers.

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In general Nestlé follows the above sequence for distribution of its
products. In India this strategy is working very effectively and
efficiently. By the above diagram, we can understand that the
products are sent to the C&F Agents of the company from its
Manufacturing Unit. Then at later stage it·s been sent to Distributor
and Super Stockist. Here, Distributor is the responsible person to
manage the availability of products in his area, whereas Super
Stockist supplies the goods to Re-Distributor who is responsible to
manage the availability of outside the region of Distributor. Then
the Distributor and Re-Distributor supply the products to
Wholesaler and Retail in their respective region or area.

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

For Example: There will be only 1 C&F Agent in Uttar Pradesh. He

will supply the goods to the Distributor of Noida / Delhi NCR. And
at the same time C&F Agent will also send goods to the Super
Stockist. But Super Stockist will no supply any goods in Noida /
Delhi NCR. Now the Rural areas near Noida / Delhi NCR will be
managed by Re-Distributor. Re-Distributor will receive goods from
Super Stockist. A Super Stockist will supply the goods to many Re-
distributors. Then at last, distributor and re-distributor will supply
goods to wholesaler and retailer in their respective areas.

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€ 8%""  <5"6 $< occurs when manufacturers (brands)

disinter mediate their channel partners, such as distributors,
retailers, dealers, and sales representatives, by selling their
products direct to consumers through general marketing
methods.
€ Channel conflict can also occur when there has been over
production. This results in a surplus of products in the market
place.
€ The products, changes in trends, insolvency of wholesalers
and retailers and the distribution of damages goods also affect
channel conflict.
€ To avoid a channel conflict in a click-and-mortar, it is of great
importance that both channels are fully integrated from all
points of view.
€ Herewith, possible confusion with customers is excluded and
an extra channel can create business advantages.
€ ;"@75A7
€ Channel partners that match marketers with wholesalers
or in organization market with customers.

€ They are very important for international marketing with

customers.

€ 85 % 7

€ A wholesaler is someone who primary sells to others
retailers.
€ Also may retail own.
€ Typically buy in bulk.

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 € Very important in rural India.

€ %$ 7
€ The most visible face of the distribution network.
€ India has the largest number of retailers in the world.

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r Vertical conflict: arises when there is a clash of interests

between member at 2 different level (like wholesaler and
retailer)
r Horizontal conflict : Is between member at the same level , ex
Retailer A vs. Retailer B
For Example: McDonalds franchisees for instance; if care is
not taken, the grumbles might be roar.
r Attitudinal causes of conflict
m Disagreement about channel roles.
m Future expectations
m Present perceptions
m Lack of expectations
r Structural Causes of conflict
m Divergence in goals
m Drives for autonomy
m Fights over scarce resources
r Felt conflict
m Related to frustration, disappointments, negative
feelings
m Agree to disagree
r Manifest conflict
m Expressed behavior
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INTERPERSONAL
INSTTUTIONAL MECHANISM MECHANISM AND THIRD
PARTY MECHANISM

1.Joint membership of 1.Mediation

association

2.Executives exchange 2.Arbitration

3.Cooption

4.Distributor councils


 
  
  

LOWER MARGIN IN THE INDUSTRY

RECKITT
PERFETTI CADBURY   LOTTE WRIGLEY·S COLGATE
BENCKISER

c 
2.5 2 . 2.5 2 2 2




4 4 /( 6 5 5.6 5




  6.5 6 -( 8.5 7 7.6 7

c
 : From the above chart, we can see that Nestlé gives the
lowest margin to its distributors in the industry.

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Hence, the margins to the retailers are also reduced. If we consider
the motivation of the retailers to keep Nestlé·s products, the
throughput or off take of Nestlé·s products is very high and most
retailers would be keen to maintain their baskets of goods, the low
margins are a dampening factor, as mentioned by a few retailers in
our interactions.


 
4 Considering the low motivation of the Nestlé

retailers, due to lower margins on products sold by them, company
should try to compensate them or give them an opportunity to
increase their profits by extending better percentage incentive
schemes on purchase in bulk. Instead of harming the profitability of
the company by extending greater margins, these schemes would
lead to high volume purchase by retailer, thereby increasing the
profitability of the company.

Issues in Implementation: The problem which could emerge while

extending greater percentage schemes are that once the retailers get
used to higher schemes on a particular product, it becomes very
difficult for the company to change/ reduce the scheme on the
product. Apart from that, profitability of the company is definitely
affected if the scheme is extended in an unplanned manner.

Tackling Implementation Issues: These schemes should not be

extended on the products haphazardly. In order to implement the
schemes, company needs to identify on which products is the
scheme suitable. The products which already have a very good pull
effect like Maggi need not be given higher schemes. The products
which majorly require pull effect like Everyday tetra pack milk,
coffee etc should be a part of such incentive schemes. In order to
have better control over the channel and prevent retailer·s
resistance while changing/reducing the scheme, company should
device a strategy of rotation of scheme among the various products
in portfolio, e.g. for Jan-Mar Company could go for higher schemes
on Everyday tetra pack milk, for April- Jul it should reduce the

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scheme on Everyday and increase the scheme on Coffee packs. The
company can further decide upon which products it wants to push
for a particular time period.

c
 : We realized that the displays bought by Nestlé were not

maintained properly and they scored low on hygiene and adherence
to planogram. As the merchandiser·s performance is not
measurable, it is not possible to make his work accountable which
results in slack of work among some merchandisers. Hence, the
main challenge lies in the fact that the merchandiser·s productivity
and effectively is currently not measured hence his performance
cannot be measured unlike Distributor Salesman whose turnover is
an important input for performance evaluation.


 
: Every Distributor will have some

merchandisers who are responsible for putting up the displays and
maintaining them, week-in and week-out. Merchandiser beat plan
covers around 40-50 outlets per week and generally, there are 1-3
merchandisers per distribution point. From our market visit, we
observed that the slack of work by merchandisers cannot be gauged
and there is lack of motivation among the merchandisers to excel in
their work. The recommendation for this is to have incentives for
merchandisers based on their work. The merchandiser·s
productivity and efficiency can be measured by the Sales Officers by
more frequent visits and taking feedback from the distributor
salesman. Incentives of Rs. 400-500 would motivate the
merchandisers and put proper effort into his job.

Issues in Implementation: The performance evaluation of

merchandisers is very subjective and incentivizing on the basis of
visits and feedback of Distributor Salesman may lead to discontent
for certain merchandisers and probable conflict with the Distributor
Salesman.

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Tackling Implementation Issues: To ensure that the incentives
structure does not cause any discontent among merchandisers, it
should be the Sales Officer·s responsibility that he keeps the
feedback from Distributor Salesmen as private so that there is no
conflict of interest and be in constant communication with the
merchandisers about their market beats and performance.






Visit Details: We visited retail outlets in Sector 18 & 29 in

Noida and Krishna Nagar in Delhi; interacted with the
retailers. We identified the problems which the retailers are
facing and possible suggestions for the company to resolve
these issues.

We also accompanied a salesman and interacted with him

to discuss the working and issues with Nestlé distribution
channel.

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 2
  
 
As 1999 drew to a close, Mary Kate Buckley, general manager of
nike.com, found herself and her division at a crossroads. Over the
last twelve months, nike.com had rolled out an ambitious e-
commerce initiative, signed an exclusive deal with Fogdog sports
that allowed NIKE products to be sold by a pure internet company
for the first time, and had grown from twelve to 150 employees. But
nike.com faced countless critical decisions in the coming months.
Specifically, nike.com needed to plan not only its own direct-to-
consumer sales strategy, but also its policies and rules for on-line
sales of NIKE products by other vendors.


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BRS, the company that would evolve into NIKE, was founded in
1964 by Phil Knight. The purpose of the company was to make
high-performance athletic shoes for the U.S. market. Knight, a
Stanford MBA and middle distance runner at the University of
Oregon, recognized an unmet need for quality athletic footwear that
could be filled inexpensively with well-made Japanese imports.
Knight started selling these imported shoes directly to runners at
track meets in his spare time and NIKE was born.

Over the following 35 years, NIKE grew from a part-time job for Phil
Knight into the world·s dominant athletic footwear and apparel
company by following a consistent and logical strategy: to capitalize
on the importance of sports in people·s lives and to be identified
with competition and victory in consumers' minds (the company is
named for the Greek goddess of Victory).

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

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

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The company's brand management efforts focused on endorsing the
best possible athletes and making the famous NIKE swoosh
ubiquitous. The roster of athletes who wore and promoted NIKE
products read like a multi-sport hall of fame, including mega-stars
such as Michael Jordan, Tiger Woods, Mia Hamm, and Ken Griffey,
Jr.

NIKE went to tremendous lengths to promote its brand and image

across the world. The company typically spent over 11% of revenues
on advertising, sports marketing and promotional spending, or
nearly one billion dollars in fiscal year 1999. (Exhibit 1) NIKE·s
advertising has included some controversial campaigns that
stressed winning above all else. Other campaigns were downright
whimsical, involving basketball encounters between humans and
loveable cartoon creatures.

NIKE was a highly centralized and extremely focused company.

Management concentrated on a few core corporate functions, such
as brand building and supply chain management. In addition, a
dedicated sales force sold NIKE products to retailers or, in a limited
number of countries, to distributors.


  

%"=6%<=77@=?? $7

Consistent with its original strategy, NIKE outsourced virtually all

of its footwear manufacturing to low-cost Asian or South American
manufacturers. By 1999, the primary locations for NIKE production
were Indonesia, Vietnam, Korea and China. Managing its global
supply chain was a core strategic advantage for NIKE and all its
operations were geared towards ensuring smooth integration with
contract manufacturing.

The company worked with hundreds of manufacturing partners in

order to develop long-term, trusting relationships. Manufacturing
partners did not necessarily provide the cheapest production, but
for the most part, they delivered consistent, timely shipments of
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goods that met NIKE·s high quality standards. The partners were
willing to invest heavily in capabilities to manufacture new designs
or features, knowing that production levels would be high enough to
offset the investment.

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

c75#=< $6<C< 

Getting a new athletic shoe model on a store shelf could take 15 to

18 months, from initial planning to final product distribution.
Volumes were determined far before shoes arrived at consumer
outlets, requiring careful forecasting from NIKE and its merchants.
A typical new NIKE shoe had a market life of 3 to 6 months from
introduction to depletion of inventories. Because the product life
was so much shorter than the production cycle, it was not possible
to adjust production runs to meet unexpected levels of consumer
demand. As a result, NIKE did not try to match supply of any given
shoe model with demand, preferring instead to set conservative
production targets and then begin designing the next generation
model.

A typical NIKE factory produced between 2,000 and 3,000 pairs of

shoes in a day, implying a production run of about three months for
a line that would sell 200,000 shoes. It was difficult for NIKE to
make money on smaller production runs, although the company did
produce some specialty shoes at considerably lower volumes.

%$ % 8%"" 

NIKE utilized a large in-house sales force to sell its products

through a number of different types of stores ² multi-sport general
athletic department stores, specialty athletic department store

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retailers and general-purpose shoe stores. Despite the company's
origins selling shoes straight to\ track runners from the back of
Phil Knight's car, NIKE had not been very interested in direct to
consumer sales. The company did not have a meaningful catalog or
mail-order business and had opened only a handful of its own
stores, called NIKE Towns. Even these NIKE-owned stores were
seen more as a marketing and brand-building effort than a
meaningful source of sales.

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

NIKE·s 40% market share in U.S. athletic footwear gave it additional

influence with the merchants who carried their products. The
company encouraged advance planning from its retail partners ²
nearly 90% of the orders it received from retailers were for future
deliveries nine months out. As a result, NIKE was able to plan
manufacturing and distribution far in advance to meet its
guaranteed future sales. NIKE was also able to negotiate favorable
contract terms with its retailers, including display characteristics,
inventory levels, and other details that affected the consumer
experience.

The company distributed most of its own products from its factories
to retail stores or retailer distribution centers. The distribution
process was extremely complex; a retailer·s monthly order of
300,000 pairs of shoes could involve over 50 different models being
shipped to 100 different locations. In the late 90s, NIKE invested
over $1 billion in several large regional distribution centers to
replace its numerous smaller centers. NIKE also started providing
discounts to retailers who managed their own distribution right
from the NIKE Factory, thus avoiding the need to go through a NIKE

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

$7<% 8%"" 

In 1999, NIKE owned and operated 13 NIKE Town superstores;

typically located in extremely high-traffic, upscale shopping
neighborhoods. The first NIKE Town store was opened in Portland
in 1990 and was described by its designer as a cross between the
Smithsonian, Disney World, and Ralph Lauren. While a broad range
of NIKE footwear and apparel was sold (at full retail price), the
layout of the store and the merchandise selection made it as much
a showcase of NIKE products as a retail store.

The Portland store was quickly followed by an even more ambitious

project in downtown Chicago. The Chicago store, a 70,000 square
foot operation located in some of the most expensive real estate in
town, quickly became the city·s largest tourist attraction as 7,500
visitors a day flooded in to see the two-story mural of Michael
Jordan and try NIKE shoes out on the miniature basketball court.

The NIKE Town stores were not run to be independently profitable,

or even to be major selling channels for NIKE products. Instead,
they were a showcase for NIKE·s newest or most innovative product
lines, an opportunity to strengthen ties with consumers, and an
extraordinary brand advertising opportunity. The stores also carried
hard-to-find products or specialty items not available from typical
retailers. Another source of sales at NIKE Towns was souvenir
items, such as the Michael Jordan paraphernalia sold at the
Chicago store. Initially, retailers were wary of the concept, fearing
they would lose sales to NIKE Town stores, but their fears were
eventually allayed as the company·s intentions became clearer.
There was a sense within NIKE that the NIKE Town stores had not
lived up to their full retail potential due to efforts to appease
retailers· concerns about competing directly with NIKE.

In addition to the NIKE Town stores, NIKE operated 53 outlet

locations to liquidate overstocked or outdated inventory. This
channel provided the company with a convenient means of

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disposing excess inventory without giving up too much control of
the brand. Prices and quality were both controlled directly to
minimize impact on the core brand, rather than relying on other
liquidation channels.

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2
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The on-line market for sporting goods in 1999 was chaotic. A

variety of types of competitors were eager to join the internet frenzy
² traditional sporting goods retailers, manufacturers focused on
selling direct to consumers, and new start-up companies formed to
take advantage of the new opportunities on the internet.
Complicating matters was the emergence of Global Sports, Inc.
(GSI), an internet start-up with an innovative outsourcing-based
business model.

7%#$$5"%  %$ 7

Virtually every significant sporting goods retailer had established

some type of web presence by late 1999. Several retailers, such as
Foot Locker and Copeland's Sports had established web businesses
on their own, typically offering a full range of products at prices
similar to what was charged in their stores. These real-world
retailers were able to leverage their existing brands and operational
capabilities to offer extensive shopping experiences. Footlocker.com,
for example, offered over 14,000 products from 150 different
manufacturers at prices equal to or lower than in-store prices.
Footlocker.com also offered in-store returns of on-line purchases,
easing the burden on the customer.

In 1999, six of the 20 largest sporting good retailers, including The

Athlete's Foot and the Sports Authority, signed deals with Global
Sports Interactive, the internet division of GSI, to manage not only
their websites but also their complete e-commerce operations.
According to these deals, GSI handled the design, order fulfillment,
processing, shipping, and business development involved with the
retailers' internet businesses. The participating retailers simply
chose their product lines and pricing strategy and generated web
customers, but GSI managed the rest of the process. By developing
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a common sporting goods e-commerce infrastructure for its
multiple retail partners, GSI claimed to lower drastically the costs
associated with electronic commerce. Each retailer collaborated
with GSI in decisions related to its brand presentation, website and
e-commerce operations.

$7<5&?$57

NIKE·s competitors, the other leading athletic footwear and apparel

manufacturers, faced similar dilemmas and problems related to
their own e-commerce strategies. Because these competitors were
smaller and less powerful than NIKE, they were even more reliant
on their traditional retail partners for sales. These companies
possessed little or no experience selling goods directly to the
consumer market and treaded lightly in their initial forays into e-
commerce.

By late 1999, virtually all of NIKE·s major competitors (Adidas,

Converse, Reebok and New Balance) had established websites with
detailed product information, store locators, and editorial content
on selected athletes or events. Each competitor, however, took a
slightly different approach to the strategy and operation of its e-
commerce capabilities. Converse offered no ecommerce functionality
or specific information on acquiring its products on-line. Adidas
and Reebok each offered limited product lines at full retail prices to
their internet customers. New Balance adopted a hybrid approach,
allowing customers to select any current product and then directing
them to the websites of its affiliated retailers (both real-world and
internet-only) who carried that product.

NIKE·s competitors were generally more willing than NIKE to allow

retailers to sell their products over the internet. The competitors did
not exert as much control over the end retail experience as NIKE
did and granted more flexibility to their internet retail partners.
Reebok allowed both on-line only and bricks-and-mortars retailers
to offer their full product lines (frequently at discounted prices) on
their websites. New Balance was slightly more protective of both
product offerings and pricing, but not nearly to NIKE·s level of
excluding internet retailers from entire product lines. Adidas was

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

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As in many other consumer segments, sporting goods attracted a

number of internet entrepreneurs seeking to take advantage of the
new technology to exploit the inefficient cost structure of traditional
retailers. These internet endeavors included full-range retailers
(such as fogdog.com) and highly specialized niche players (such as
lucy.com, focusing on women's sports or chipshot.com, selling
custom-made golf clubs). In addition to the internet retailers, many
sports media concerns were eager to leverage their viewer base into
e-commerce customers. ESPN.com, a division of Walt Disney
Corporation, and SportsLine.com (partially owned by CBS) each had
avid followings among sports fans due to the content they had been
able to leverage from their media conglomerate owners. Each of
those companies were making major pushes to convert their
website viewers into purchasers.

   




87"7" 7D 5"2 E

As new on-line retailers were created and traditional retailers

launched their own internet initiatives, NIKE was bombarded with
requests from merchants to sell NIKE products on-line. Initially, the
company was extremely hesitant; worrying that the NIKE brand
value would be diluted by careless internet retailers.

"We saw a lot of online retailers who were not putting the right
emphasis on product presentation," explained Mary Kate Buckley.
"Our bricks-and-mortars partners offer a convenient location where
customers can feel the product quality and try products on « we
were concerned that over time if everyone is selling the same thing
online, the only difference would be price."

NIKE·s traditional retail partners were anxious to expand into on-

line sales, but NIKE moved cautiously, allowing its largest retail
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partners to sell NIKE products on their websites, provided they
maintained the same standards enforced at the stores. Foot Locker
and Copeland Sports (through its shopsports.com division) each
started selling NIKE products, but Copeland quickly learned that
NIKE's concerns were to be taken seriously. In the summer of 1999,
NIKE stopped selling to shopsports.com, explaining that "they were
not meeting our marketing standards."

Although NIKE resumed sales to shopsports.com shortly thereafter,

the company's point had been made to retailers. By the end of
1999, NIKE had approved ten of its bricks-and-mortar retail
partners to sell NIKE products over the internet. The company
remained unconvinced, however, that all those retailers would be
able to deliver acceptable service levels, and continued to monitor
their performance carefully.

Some internet sellers were able to acquire NIKE products from other
retailers' overstocks and other unofficial channels. Once these
goods had passed from the hands of NIKE-authorized retailers,
NIKE no longer had any say over how the products were marketed
or priced. Because NIKE handled its own international distribution
and managed inventory liquidation through its own outlets,
however, the company saw less of these after-market resales than
other manufacturers. In addition, NIKE strictly enforced sales
agreements with retailers and actively policed the web for offenders.

5;#5;% 

In September of 1999, NIKE signed a deal with internet sporting

goods retailer Fogdog Sports that allowed Fogdog to sell the entire
NIKE product line on its website. Fogdog was given exclusive access
(among internet-only sellers) to the NIKE product line for six
months in return for warrants to buy up to 12% of Fogdog's shares
at a pre-IPO valuation.

Fogdog Sports was founded in early 1998 (originally as

SportSite.com) to sell athletic gear directly to consumers over the
internet. The company was the evolution of a web design and e-
commerce Company started in 1994 by three graduates of Stanford

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University. In 1998 the company attracted venture capital financing
from VenRock Associates and Draper Fisher Jurvetson. In
September of 1999, after negotiations with NIKE had begun, Fogdog
hired Tim Joyce, formerly VP of Global Sales at NIKE, to be its new
president.

Fogdog had repeatedly requested to carry the NIKE product line,

only to be rebuffed by NIKE, like every other internet retailer. In the
end, Fogdog·s pricing policy of respecting manufacturers·
recommended minimum prices and reputation was attractive to
NIKE. Fogdog was able to point to three years of consistently
executing its pricing policy. Due to its ownership stake, NIKE had
an incentive to make the deal work for both sides and agreed to
treat Fogdog like any other major account, including preferred
prices, joint promotions, and information sharing. Fogdog also
received other special considerations from NIKE, such as product
images for display on the fogdog.com website, product and sales
data sharing, and unusual return privileges.

As part of the Fogdog deal, NIKE agreed not to sell to other virtual
retailers including those sites managed by Global Sports, Inc. for at
least six months. This promise was sure to anger some of NIKE·s
most important bricks-and-mortar partners, such as The Athlete·s
Foot, which relied on NIKE for 40% of their footwear sales. Michael
Rubin, the young CEO of GSI, commented on the channel conflict
that NIKE faced: "Our six partners are all among NIKE·s top 20
accounts. NIKE needs to support them, and they need to be on the
internet in order to survive in the 21st century."

"$A<5&

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

provide information and entertaining content to NIKE customers.
There were no e-commerce capabilities on the site; instead, it
reflected a typical NIKE approach to brand building. Different
sports received their own separate pages, with tips and advice from
NIKE athletes, news and updates on sports events, and detailed
product information, including design inspirations and athlete
endorsements.

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Despite the lack of e-commerce and no efforts to drive traffic to the
site through advertising expenditures, the nike.com site logged 14
million visitors in 1998. At first, NIKE proceeded with extreme
caution on the internet. A plan to sell posters on the NIKE website
was considered for nearly a year before being launched during the
Christmas 1998 season. Over the next twelve months, however,
NIKE·s website strategy evolved substantially.

In February of 1999, Nike launched a test to sell its high-end Alpha

Project line of footwear and apparel. In addition, the website was
redesigned to provide a store locator and more detailed product
information.

In June of 1999, NIKE re-launched a completely overhauled and

redesigned website, with greatly expanded e-commerce
functionality. NIKE made hundreds of its most popular products
available for purchase, all at full retail prices. The June re-launch
was the first time the company·s senior management seemed to
understand the revolutionary importance of the internet. Phil
Knight commented to the media that "on-line commerce is a partial
return to our original roots of selling products at track meets from
the trunks of our cars -- rekindling the direct relationship between
NIKE and its consumers."

Despite the significant new push into e-commerce, NIKE

maintained much of its previous website focus on brand-building
and inspirational content. NIKE added profiles on NIKE athletes of
all levels, new information on future product development, and
innovative new technologies. Many of the web functions were so
advanced that some consumers were unable to use them all without
downloading various plug-ins. "I wouldn·t say we·re on the bleeding
edge of design technology, but I will say we·re on the bruised edge,"
said nike.com·s creative director, Bob Lambie.





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?7%$5"% 5"<7"

Running a successful e-commerce business required distinct

operational capabilities that NIKE did not possess. Because NIKE
had no experience with remote order fulfillment, it lacked any
knowledge or expertise in packing and shipping boxes, tracking
delivery, or customer service. Rather than building each of those
capabilities from scratch, NIKE chose to outsource the new
functions to United Parcel Service (UPS). In a far-reaching
agreement, UPS agreed to provide warehousing and shipping
services as well as a call center with 500 dedicated customer service
operators. It was uncharacteristic of NIKE to entrust their brand
identity to another company, but NIKE believed it was preferable to
doing an inferior job in-house and afforded NIKE the opportunity to
learn and gather data.

To provide a positive experience for its e-commerce customers,

NIKE needed vital new skills in web design, systems infrastructure,
and other related IT areas. The company outsourced many of these
needs and relied on proven market leaders like InterWorld
Corporation for its enterprise commerce software and Red Sky
Interactive for website design and production.

7%;$<5"<7"

The new dedication to direct e-commerce over the nike.com website

raised significant strategic concerns for NIKE and its partners.
Traditional retailers of NIKE products, always concerned about
being cannibalized by direct sales, had more reason to worry than
ever before as they were denied the opportunity to compete head-to-
head with NIKE for internet customers. NIKE knew it would have to
strike a difficult balance to keep its traditional retailers content
while expanding the company·s own direct sales efforts. NIKE hoped
that by maintaining full retail pricing on its site, it would alleviate
traditional retailers· concerns over unfair competition. "We are
hoping that our website will expand the pie, not take market share
away from retailers," explained Mary
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Kate Buckley. Nevertheless, NIKE understood that the real
opportunity for nike.com lay in defining a new, more profitable
channel for selling shoes and other goods to consumers. ´We want
to be cognizant of channel conflict,µ said Buckley, ´not apologize for
it.µ In addition to the risk of alienating its retailers, NIKE was
concerned about the experience of its e-commerce customers. NIKE
had never before had significant direct contact with consumers and
would now need to tailor the shopping experience to be consistent
with the NIKE brand. For products like athletic shoes, with a high
"touch-and-feel" component, NIKE would have to find creative ways
to satisfy customers· desire to know how the products looked and
fit. It was hard to see how NIKE could fulfill that need without
continuing support from its bricks-and-mortars partners.

As NIKE considered further expansion into e-commerce, the

company had to rethink its approach to nearly every core function it
performed or managed. Manufacturing standards would have to
change if NIKE was to ship goods directly to consumers who had to
rely on consistent sizing for sight-unseen purchases. NIKE needed
to learn manufacturing planning and inventory management to suit
uncertain consumer demand rather than pre-determined retailer
orders. The customization of marketing facilitated by the web gave
NIKE reason to rethink its approach to athlete selection as athletes
with smaller but intensely loyal fan bases could be better utilized.
Direct-to-consumer sales also allowed for greater pricing flexibility
and forced NIKE to better understand price sensitivity across
narrow bands of consumers.


7;%"$>%$5"% =

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

number of organizational dilemmas that defied easy answers. The
initial stages of NIKE·s e-commerce launch were conducted in
stealth mode by a small team that reported directly to the president
of the company. Decisions were made quickly and often secretly, in
stark contrast to NIKE·s culture of candor and consensus. The
media eagerly reported on any new developments and speculated on
what the future held for nike.com.

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Once it became clear that nike.com would play an integral role in
the future of the company, it became a vastly larger and more
visible department. Nevertheless, it retained an aura of distinction
within the company. At a time of disciplined spending within NIKE,
the online division was seen as having an enviably large budget and
a willingness to spend. When nike.com began reporting directly to
Phil Knight in the summer of 1999, its stature within the company
and in the media increased. Despite rapid headcount growth and a
preference for internal candidates, nike.com was unable to satisfy
the ever-growing roster of internal applicants.

As other NIKE departments began to realize the fundamental

importance of nike.com, they became involved in its major strategic
decisions. The sales department helped to ensure that online sales
policies were consistent with NIKE·s fundamental standards and
policies. The manufacturing department collaborated on plans to
produce customized shoes for specific online customers based on
individual preferences. The marketing department assessed every
real world advertising campaign to determine how it could best be
modified for the on-line world.

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NIKE's e-commerce operations presented several new opportunities

that were not available to NIKE under its old wholesaling model. For
the first time, NIKE was in a position to directly collect large
amounts of customer data, covering not only the demographics of
its customer base, but also customer shopping habits ² price
sensitivity, purchase frequency, and product bundling. With this
information in hand, NIKE would have the ability to market new
goods or services to exactly the right customers, increasing the
effectiveness of its extensive marketing efforts.\

Perhaps the most important new opportunity to NIKE was the

ability to capture the enormous mark-ups between wholesale and
retail prices for its goods (see Exhibit 5 for a breakdown of the value
chain). NIKE had been extremely successful throughout its history
at managing its value chain while only participating in the central

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and core functions. By not performing either the manufacturing or
the selling in-house, NIKE had been able to grow dramatically while
staying very profitable. Encroaching into the new territory of direct
sales presented NIKE with an opportunity to capture more of the
value chain than ever before.

 

NIKE understood throughout 1999 that the most important goal

was to learn as much as possible about doing business over the
internet. Mary Kate Buckley explained NIKE·s internet philosophy
in June of 1999: "The new site is really just the next stage in a
grand experiment. . . More than anything, our work over the last six
months has proven that the future of internet presence for a global
brand like NIKE will be in a constant state of incubation." At the
same time, Buckley understood that the real opportunity for
nike.com lay in defining a new, more profitable way of selling
products to its loyal consumers. She began to think about what
steps NIKE should take in the year 2000.

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