PROJECT REPORT ON MANAGING CHANNEL CONFLICTS OF ¶NESTLÉ· AMITY BUSINESS SCHOOL ² AUUP.

SUBMITTED TO:MS. VANDANA GUPTA

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

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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CERTIFICATE
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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a nutritious gruel for children. the Nestlé family has grown to include chocolates. frozen products. As the years have passed. Nestlé markets a great number of products. Nestlé employ around 250. Beginning in the 70s. the pharmacist. which means ·little nest·. Nestlé·s success with product innovations and business acquisitions has turned it into the largest Food Company in the world. throughout their lives.000 people from more than 70 countries and have factories or operations in almost every country in the world. pharmaceutical products and cosmetics too. whatever their needs. The nest. mineral water and other food products. wherever they are. Today. Sales at the end of 2005 were CHF 91 bn. The Company's priority is to bring the best and most relevant products to people. soups. Long-term potential is never sacrificed for short term performance. Henri used his surname. with a net profit of CHF 8 bn. family and nourishment. Since it began over 130 years ago. still plays a central role in Nestlé·s profile.INTRODUCTION Nestlé was founded in 1866 by Henri Nestlé and is today the world's biggest food and beverage company. cereals. which symbolizes security. Nestlé's existing products grow through innovation and renovation while maintaining a balance in geographic activities and product lines. launched his product Farine Lactée Nestlé. Nestlé has continued to expand its product portfolio to include pet foods. The history of Nestlé began in Switzerland in 1867 when Henri Nestlé. coffee. Page 4 of 36 . 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. in both the company name and the logotype. yoghurts.

of Switzerland. With seven factories and a large number of co-packers. 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 vibrant Company that provides consumers in India with products of global standards and is committed to long-term sustainable growth and shareholder satisfaction. decentralize what you can'. Page 5 of 36 . which means each country is responsible for the efficient running of its business .Taste of Nestlé in each of the countries where Nestlé sell products. ´THINKING GLOBALLY ² ACTING LOCALLYµ INTRODUCTION TO NESTLÉ INDIA Nestlé India is a subsidiary of Nestlé S. 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'.including the recruitment of its staff. The Company insists on honesty.A. It's an approach that is best summed up as: 'centralize what you must. Nestlé is based on the principle of decentralization. That's not to say that every operating company can do as it wishes. integrity and fairness in all aspects of its business and expects the same in its relationships. Headquarters in Vevey sets the overall strategy and ensures that it is carried out.

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. After India·s independence in 1947. importing and selling finished products in the Indian market. Punjab. For more on Nestlé Agricultural Services. services and other goods. Nestlé set up milk collection centers that would not only ensure prompt collection and pay fair prices. suppliers of packaging materials. to irrigation. scientific crop management practices and helping with the procurement of bank loans. but a thriving hub of industrial activity. where the Government wanted Nestlé to develop the milk economy. Nestlé responded to India·s aspirations by forming a company in India and set up its first factory in 1961 at Moga.AN OVERVIEW Nestlé·s relationship with India dates back to 1912. when it began trading as The Nestlé Anglo-Swiss Condensed Milk Company (Export) Limited. the economic policies of the Indian Government emphasized the need for local production. The Company's activities in India have facilitated direct and indirect employment and provides livelihood to about one million people including farmers. The Company continuously focuses its efforts to better understand the changing lifestyles of India and anticipate consumer needs in order to provide Taste. Health and Wellness through its Page 6 of 36 . 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. Nutrition. Progress in Moga required the introduction of Nestlé·s Agricultural Services to educate advice and help the farmer in a variety of aspects. as well. but also instill amongst the community. From increasing the milk yield of their cows through improved dairy farming methods. a confidence in the dairy business.

BAR-ONE. Nestlé India manufactures products of truly international quality under internationally famous brand names such as NESCAFÉ. in 1993. safe food products at affordable prices. MILKYBAR. Nestlé India has presence across India with 7 manufacturing facilities and 4 branch offices spread across the region. set up in 1961 at Moga (Punjab). Nestlé India·s first production facility. in 1995 and 1997 Page 7 of 36 . MAGGI. PRESENCE IN INDIA After nearly a century-old association with the country. was followed soon after by its second plant. 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. NESTLÉ Fresh 'n' Natural Dahi and NESTLÉ Jeera Raita. This was succeeded by the commissioning of two more factories . Nestlé India is a responsible organization and facilitates initiatives that help to improve the quality of life in the communities where it operates. in 1989. It helps the Company to create value that can be sustained over the long term by offering consumers a wide variety of high quality. today. and Samalkha (Haryana). 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.at Ponda and Bicholim. set up at Choladi (Tamil Nadu). Nestlé India set up factories in Nanjangud (Karnataka).product offerings. MILO. in 1967. KIT KAT. Goa. Consequently.

Connaught Circus.: 011. Gurgaon . DLF City. Tel.respectively.: 0124 ² 2389400. REGISTERED OFFICE Nestlé India Limited M-5A. Phase II. HEAD OFFICE Nestlé India Limited Nestlé House Jacaranda Marg. Tel. Page 8 of 36 . Mumbai. The 4 branch offices in the country help facilitate the sales and marketing of its products. in 2006. Haryana. The seventh factory was set up at Pantnagar. New Delhi ² 110001. 'M' Block. They are in Delhi. Uttarakhand. The Nestlé India head office is located in Gurgaon.122002 (Haryana). Chennai and Kolkata.41514444.

EVOLUTION OF NESTLÉ 1867 Henri Nestlé founded the company in Vevey. 1962 Nestlé purchases Findus.the world·s first instant coffee. 1977 Nestlé purchases Alcon. Page 9 of 36 . 1929 Nestlé merges with Peter-Cailler-Kohler Chocolates Suisses S. manufacturer of eye care products and kits. Switzerland. 1985 Nestlé purchases the Food Company Carnation. 1898 Nestlé purchases its first factory outside of Switzerland Viking Milk factory in Norway.A.A. 1938 Nestlé launches Nescafé . 1905 Nestlé merges with Anglo-Swiss Condensed Milk Company. 1974 Nestlé becomes a significant shareholder in the Cosmetics Company L·Oréal. 1947 Nestlé merges with Alimentana S. with the brand Maggi.

This implies gaining a deeper understanding in many areas of nutrition and food research and transforming the scientific advances into applications for the company. VISION OF NESTLÉ Nestlé's vision of making good food central to enjoying a good healthy life for consumers everywhere. 1998 Nestlé purchases Spillers pet foods business. the premier pet food company in North America. Nestlé·s aim is to meet the various needs of the consumer every day by marketing and selling food of a consistently high quality. and with unique expertise in the dry dog food area. Having a broad vision the company is doing its best for their consumers to show the great sense of responsibility.1988 Nestlé purchases the confectionary company Rowntree Mackintosh and the pasta company Buitoni-Perugina. 1992 Nestlé purchases the mineral water Company Perrier. Page 10 of 36 . 2001 Nestlé merges with Ralston Purina. 2000 Nestlé sells the Findus brand in all countries except for Switzerland.

HIGH QUALITY AND COLLABORATION Our objectives are to deliver the very best quality in everything we do. FOCUS ON E-BUSINESS & WEBSITES Increased investments in the sphere of e-business give us swifter business and direct contact with trade. We hope that through a sincere approach and by conducting dialogues. to recipes and packaging materials. Our website is a forum for consumers. change and satisfy the demands and wishes of the people of today. Page 11 of 36 . choice of suppliers and transport. we will be able to improve. both when it comes to the distribution chain and to concentrating on joint product launches and campaigns. from primary produce. research and development.consumers relate to this and feel they can trust our products. future employees and the media. as well as continuity .The confidences that consumers have in our brands is a result of our company·s many years of knowledge in marketing. students. Our operations and collaboration in the Nordic countries gives us greater opportunities to be efficient and strategic and to function well as an organization.

Yoco. Ninho. La Lechera. Chiquitin. Drumstick/Extrême. S. Performance nutrition PowerBar. Nestum. Molico. Water Nestlé Pure Life. Antica Gelateria del Corso. Milo. Nesquik. Other beverages Nestea. Nido. Contrex. Ricoffy. Mövenpick. Good Start. Pria. Bonka. Nestogen. Chilled Nestlé. Cerelac. Taster·s Choice. Milkmaid. Nespray. Ice cream Nestlé. Caro. Vittel. Svelty.Pellegrino. Carnation. Svelty. yougart. Poland Spring. Nan. Musashi. Guigoz. Levissima. Nestlé Omega Plus. Nescau. Infant nutrition Nestlé. Shelf stable Nestlé. Nestlé Aquarel. Bear Brand. Moça. Lactogen. Neslac. Dreyer's/Edy's. Zoégas. Coffee-Mate. Carnation. Ice Mountain. Nespresso. Ski. Ozarka. Perrier. Beba. milk pak. Klim. Maxibon/Tandem. Nestomalt. Gloria. Molico. Nestlé. Mega. LC1. Sveltesse. Loumidis. Libby·s.MAIN BRANDS OF NESTLÉ ARE AS UNDER: Coffee Nescafé. Arrowhead. Zephyrhills. Hépar. Acqua Panna. Sin Parar/Sem Parar/Non Stop. Page 12 of 36 . La Lechera. Ricoré. La Laitière. Deer Park.

Fibre 1. L'Oreal. Lancôme. Golden Nuggets. Plenitude. Maybe line. Cosmence. Honey Nut. and Maggi. Chocolate and biscuits Nestlé. Modulen. Helena Rubenstein. Felix. Innéov. Buitoni. Lean Cuisine. Shred dies: Coco and frosted. Clinutren. Cereals Cheerios & Honey Nut Cheerios. Polo. BETA. pasta. Garnier. soups. Force Flakes Fruitful. Galak/Milkybar. Body Shop. Page 13 of 36 . Torchin. seasonings. Bonio. Metamorphosis.HealthCare nutrition Nutren. Matrix. Butterfinger. Frozen foods Stouffer·s. Purina. Cosmetics Biotherm. Pet food Arthur's. Bakers. Hot Pockets. Fruitful. Smarties. Kit Kat. Cailler. Herta. Spiller's Winalot. Red ken. Bouillons. Winiary. Maggi. Refrigerated products Nestlé. Cookie Crisp Shreddies. Crunch. Thomy. Nesquik cereal Shredded Wheat including: Bite size. sauces. La Roche-Posay. and Toll House. Buitoni. Godog. Pro Plan. Buitoni. Peptamen. Fitnesse.Clusters. Aero. Friskies Go-Cat. Cinnamon and Golden Grahams .

Nestlé has its own distribution networks equipped with all necessary transportation facilities. The organization may fail. Distribution system of Nestlé is one of major source of competitive edge over its existing rivals. Page 14 of 36 . They transport their products at major regional sales offices. These sales offices (distribution centers) have their own vans with sales people who sell and transport goods to the small retailers. which are situated at different cities of India. if its distribution networks are not efficient and unable to provide the necessary items at required place and at reasonable time.STOCKIST WHOLESALER RETAILER RE .DISTRIBUTION CHANNEL MANUFACTURER CARRIAGE & FORWARDER AGENT DISTRIBUTOR SUPER .DISTRIBUTER RETAILER Distribution plays important role in success and failure of any organization.

whereas Super Stockist supplies the goods to Re-Distributor who is responsible to manage the availability of outside the region of Distributor. In India this strategy is working very effectively and efficiently. distributor and re-distributor will supply goods to wholesaler and retailer in their respective areas.In general Nestlé follows the above sequence for distribution of its products. Now. He will supply the goods to the Distributor of Noida / Delhi NCR. For Example: There will be only 1 C&F Agent in Uttar Pradesh. Then at later stage it·s been sent to Distributor and Super Stockist. Distributor is the responsible person to manage the availability of products in his area. That distributor will be having responsibility to maintain the proper flow of goods in his region. There will be a single C&F Agent for every state who supplies the goods to the Distributor. But Super Stockist will no supply any goods in Noida / Delhi NCR. we can understand that the products are sent to the C&F Agents of the company from its Manufacturing Unit. 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. A Super Stockist will supply the goods to many Redistributors. Then at last. distributor will be appointed by the company for every urban city. Page 15 of 36 . Now the Rural areas near Noida / Delhi NCR will be managed by Re-Distributor. Re-Distributor will receive goods from Super Stockist. By the above diagram. Then the Distributor and Re-Distributor supply the products to Wholesaler and Retail in their respective region or area. And at the same time C&F Agent will also send goods to the Super Stockist. Here.

‡ To avoid a channel conflict in a click-and-mortar. Page 16 of 36 . ‡ They are very important for international marketing with customers. This results in a surplus of products in the market place. such as distributors. ‡ Channel partners that match marketers with wholesalers or in organization market with customers. ‡ The products. retailers. and sales representatives. ‡ Typically buy in bulk. possible confusion with customers is excluded and an extra channel can create business advantages. by selling their products direct to consumers through general marketing methods. insolvency of wholesalers and retailers and the distribution of damages goods also affect channel conflict.CHANNEL CONFLICT ‡ Channel conflict occurs when manufacturers (brands) disinter mediate their channel partners. ‡ Wholesalers. ‡ A wholesaler is someone who primary sells to others retailers. dealers. ‡ Herewith. changes in trends. ‡ Agents / Brokers. ‡ Channel conflict can also occur when there has been over production. it is of great importance that both channels are fully integrated from all points of view. ‡ Also may retail own.

TYPES OF CHANNEL CONFLICT y Vertical conflict: arises when there is a clash of interests between member at 2 different level (like wholesaler and retailer) y Horizontal conflict : Is between member at the same level . the grumbles might be roar. ‡ India has the largest number of retailers in the world. disappointments. negative feelings ± Agree to disagree y Manifest conflict ± Expressed behavior Page 17 of 36 . ‡ The most visible face of the distribution network. Retailer B For Example: McDonalds franchisees for instance. y Attitudinal causes of conflict ± Disagreement about channel roles. ± Future expectations ± Present perceptions ± Lack of expectations y Structural Causes of conflict ± Divergence in goals ± Drives for autonomy ± Fights over scarce resources y Felt conflict ± Related to frustration. if care is not taken. ‡ Retailer.‡ Very important in rural India. ex Retailer A vs.

we can see that Nestlé gives the lowest margin to its distributors in the industry. Mediation INSTTUTIONAL MECHANISM 1.8 5.5 5 7 5. Executives exchange 3.5 WRIGLEY·S 2 COLGATE 2 RECKITT BENCKISER 2 4 6.5 4 6 6 8.TWO MECHANISMS FOR CONFLICT MANAGEMENT INTERPERSONAL MECHANISM AND THIRD PARTY MECHANISM 1. Arbitration CONFLICTS FOUND DURING RESEARCH LOWER MARGIN IN THE INDUSTRY PERFETTI SUPER STOCKIST SUB STOCKIST TOTAL 2.5 CADBURY 2 NESTLÉ 2 3.6 5 7 PROBLEM: From the above chart.8 LOTTE 2. Cooption 4. Distributor councils of 2.6 7. Joint membership association 2. Page 18 of 36 .

as mentioned by a few retailers in our interactions. for April.Hence. 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. the low margins are a dampening factor. due to lower margins on products sold by them. Instead of harming the profitability of the company by extending greater margins. company needs to identify on which products is the scheme suitable. If we consider the motivation of the retailers to keep Nestlé·s products. The products which majorly require pull effect like Everyday tetra pack milk. Tackling Implementation Issues: These schemes should not be extended on the products haphazardly. The products which already have a very good pull effect like Maggi need not be given higher schemes. the throughput or off take of Nestlé·s products is very high and most retailers would be keen to maintain their baskets of goods. it becomes very difficult for the company to change/ reduce the scheme on the product. e. these schemes would lead to high volume purchase by retailer. the margins to the retailers are also reduced. In order to have better control over the channel and prevent retailer·s resistance while changing/reducing the scheme.Jul it should reduce the Page 19 of 36 . profitability of the company is definitely affected if the scheme is extended in an unplanned manner. In order to implement the schemes. coffee etc should be a part of such incentive schemes.g. 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. RECOMMENDATION: Considering the low motivation of the Nestlé retailers. thereby increasing the profitability of the company. company should device a strategy of rotation of scheme among the various products in portfolio. for Jan-Mar Company could go for higher schemes on Everyday tetra pack milk. Apart from that.

As the merchandiser·s performance is not measurable. Every Distributor will have some RECOMMENDATION: merchandisers who are responsible for putting up the displays and maintaining them. Page 20 of 36 . 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. The company can further decide upon which products it wants to push for a particular time period.scheme on Everyday and increase the scheme on Coffee packs. Merchandiser beat plan covers around 40-50 outlets per week and generally. 400-500 would motivate the merchandisers and put proper effort into his job. 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. Incentives of Rs. The merchandiser·s productivity and efficiency can be measured by the Sales Officers by more frequent visits and taking feedback from the distributor salesman. Hence. PROBLEM: We realized that the displays bought by Nestlé were not maintained properly and they scored low on hygiene and adherence to planogram. it is not possible to make his work accountable which results in slack of work among some merchandisers. there are 1-3 merchandisers per distribution point. The recommendation for this is to have incentives for merchandisers based on their work. From our market visit. 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. week-in and week-out.

interacted with the retailers. We also accompanied a salesman and interacted with him to discuss the working and issues with Nestlé distribution channel.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. Page 21 of 36 . Visit Details: We visited retail outlets in Sector 18 & 29 in Noida and Krishna Nagar in Delhi. We identified the problems which the retailers are facing and possible suggestions for the company to resolve these issues.

Knight had held close control of the company since its founding and had ruled with a shifting mix of closely allied senior managers. But nike. found herself and her division at a crossroads. a Stanford MBA and middle distance runner at the University of Oregon. nike. signed an exclusive deal with Fogdog sports that allowed NIKE products to be sold by a pure internet company for the first time.com needed to plan not only its own direct-toconsumer sales strategy. general manager of nike. recognized an unmet need for quality athletic footwear that could be filled inexpensively with well-made Japanese imports. and had grown from twelve to 150 employees.S. 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). Oregon. The NIKE culture was famous for its internal collegiality and outward competitiveness.com had rolled out an ambitious ecommerce initiative. market.com.NIKE . nike. NIKE stood out as atypical for a large apparel company.com faced countless critical decisions in the coming months. Over the last twelve months.CASE STUDY ON CHANNEL CONFLICT As 1999 drew to a close. The purpose of the company was to make high-performance athletic shoes for the U. COMPANY HISTORY. STRATEGY AND STRUCTURE BRS. was founded in 1964 by Phil Knight. Located on a bucolic campus in Beaverton. Knight. a tribute to founder Phil Knight's influence on the firm. Specifically. Knight started selling these imported shoes directly to runners at track meets in his spare time and NIKE was born. Page 22 of 36 . but also its policies and rules for on-line sales of NIKE products by other vendors. Over the following 35 years. the company that would evolve into NIKE. Mary Kate Buckley.

such as brand building and supply chain management. The company worked with hundreds of manufacturing partners in order to develop long-term. to distributors. in a limited number of countries. involving basketball encounters between humans and loveable cartoon creatures. NIKE went to tremendous lengths to promote its brand and image across the world. sports marketing and promotional spending. (Exhibit 1) NIKE·s advertising has included some controversial campaigns that stressed winning above all else. Other campaigns were downright whimsical. a dedicated sales force sold NIKE products to retailers or. the primary locations for NIKE production were Indonesia. Vietnam. The roster of athletes who wore and promoted NIKE products read like a multi-sport hall of fame. Tiger Woods. Korea and China. Management concentrated on a few core corporate functions. Mia Hamm. or nearly one billion dollars in fiscal year 1999. Manufacturing partners did not necessarily provide the cheapest production.The company's brand management efforts focused on endorsing the best possible athletes and making the famous NIKE swoosh ubiquitous. The company typically spent over 11% of revenues on advertising. but for the most part. 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. trusting relationships. NIKE was a highly centralized and extremely focused company. Jr. timely shipments of Page 23 of 36 . including mega-stars such as Michael Jordan. By 1999. NIKE outsourced virtually all of its footwear manufacturing to low-cost Asian or South American manufacturers. NIKE VALUE CHAIN Manufacturers / Suppliers Consistent with its original strategy. In addition. they delivered consistent. and Ken Griffey.

Once production was fully on-line.goods that met NIKE·s high quality standards. NIKE did not try to match supply of any given shoe model with demand. implying a production run of about three months for a line that would sell 200. requiring careful forecasting from NIKE and its merchants. NIKE generated all its own new product ideas and managed the design process in-house. A typical new NIKE shoe had a market life of 3 to 6 months from introduction to depletion of inventories.000 and 3.000 pairs of shoes in a day. plus an additional 30 days for shipping by sea freight. The partners were willing to invest heavily in capabilities to manufacture new designs or features.000 shoes. Retail Sales Channel 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. A typical NIKE factory produced between 2. a manufacturer would begin the eight-month product cycle process of developing volume production capabilities in all the relevant sizes. specialty athletic department store Page 24 of 36 . knowing that production levels would be high enough to offset the investment. It was difficult for NIKE to make money on smaller production runs. NIKE could expect orders to be fulfilled within 90 days. Once a design was perfected. although the company did produce some specialty shoes at considerably lower volumes. As a result. from initial planning to final product distribution. preferring instead to set conservative production targets and then begin designing the next generation model. Because the product life was so much shorter than the production cycle. Product Lifecycle Getting a new athletic shoe model on a store shelf could take 15 to 18 months. Volumes were determined far before shoes arrived at consumer outlets. it was not possible to adjust production runs to meet unexpected levels of consumer demand.

athletic footwear gave it additional influence with the merchants who carried their products. The company distributed most of its own products from its factories to retail stores or retailer distribution centers. The distribution process was extremely complex. The retail market for athletic footwear and apparel was extremely fragmented. (Exhibits 2. leading to frequent stock outs and misallocations of inventories. NIKE·s 40% market share in U.S. thus avoiding the need to go through a NIKE Page 25 of 36 . Despite the company's origins selling shoes straight to\ track runners from the back of Phil Knight's car.retailers and general-purpose shoe stores. NIKE had not been very interested in direct to consumer sales. NIKE invested over $1 billion in several large regional distribution centers to replace its numerous smaller centers. 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. sales. NIKE was able to plan manufacturing and distribution far in advance to meet its guaranteed future sales. The company did not have a meaningful catalog or mail-order business and had opened only a handful of its own stores. including display characteristics. NIKE also started providing discounts to retailers who managed their own distribution right from the NIKE Factory. Because these retailers were so small. Even these NIKE-owned stores were seen more as a marketing and brand-building effort than a meaningful source of sales. called NIKE Towns. In the late 90s.000 pairs of shoes could involve over 50 different models being shipped to 100 different locations. 3 and 4) The top ten sporting goods retailers represented a mere 14% of total U. inventory levels. and other details that affected the consumer experience. As a result. they had been slow to implement sophisticated technology to track purchases and inventory. 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. a retailer·s monthly order of 300. NIKE was also able to negotiate favorable contract terms with its retailers.S.

fearing they would lose sales to NIKE Town stores. While a broad range of NIKE footwear and apparel was sold (at full retail price). The NIKE Town stores were not run to be independently profitable. 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. typically located in extremely high-traffic. such as the Michael Jordan paraphernalia sold at the Chicago store. retailers were wary of the concept. The Chicago store.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. Initially.000 square foot operation located in some of the most expensive real estate in town. Instead. NIKE tried to keep inventories to a bare minimum and managed over 5 inventory turns a year. upscale shopping neighborhoods.distribution center at all. This channel provided the company with a convenient means of Page 26 of 36 . a 70. Another source of sales at NIKE Towns was souvenir items. but their fears were eventually allayed as the company·s intentions became clearer. The Portland store was quickly followed by an even more ambitious project in downtown Chicago. or even to be major selling channels for NIKE products. Disney World. NIKE operated 53 outlet locations to liquidate overstocked or outdated inventory. they were a showcase for NIKE·s newest or most innovative product lines. and an extraordinary brand advertising opportunity. an opportunity to strengthen ties with consumers. and Ralph Lauren. NIKE owned and operated 13 NIKE Town superstores. Direct Sales Channels In 1999. the layout of the store and the merchandise selection made it as much a showcase of NIKE products as a retail store. The first NIKE Town store was opened in Portland in 1990 and was described by its designer as a cross between the Smithsonian. The stores also carried hard-to-find products or specialty items not available from typical retailers. In addition to the NIKE Town stores. quickly became the city·s largest tourist attraction as 7.

the internet division of GSI. offered over 14. six of the 20 largest sporting good retailers.com also offered in-store returns of on-line purchases. but GSI managed the rest of the process. rather than relying on other liquidation channels.000 products from 150 different manufacturers at prices equal to or lower than in-store prices. Complicating matters was the emergence of Global Sports. Several retailers. such as Foot Locker and Copeland's Sports had established web businesses on their own. shipping. A variety of types of competitors were eager to join the internet frenzy ² traditional sporting goods retailers. Footlocker. and business development involved with the retailers' internet businesses. In 1999. Inc. for example. By developing Page 27 of 36 . manufacturers focused on selling direct to consumers. to manage not only their websites but also their complete e-commerce operations. including The Athlete's Foot and the Sports Authority. According to these deals. These real-world retailers were able to leverage their existing brands and operational capabilities to offer extensive shopping experiences.disposing excess inventory without giving up too much control of the brand. (GSI). order fulfillment. typically offering a full range of products at prices similar to what was charged in their stores. and new start-up companies formed to take advantage of the new opportunities on the internet. Footlocker. an internet start-up with an innovative outsourcing-based business model. Prices and quality were both controlled directly to minimize impact on the core brand. Traditional Retailers Virtually every significant sporting goods retailer had established some type of web presence by late 1999. easing the burden on the customer. THE SPORTING GOODS E-COMMERCE LANDSCAPE The on-line market for sporting goods in 1999 was chaotic. processing.com. The participating retailers simply chose their product lines and pricing strategy and generated web customers. signed deals with Global Sports Interactive. GSI handled the design.

New Balance was slightly more protective of both product offerings and pricing. Converse. store locators. and editorial content on selected athletes or events. Reebok allowed both on-line only and bricks-and-mortars retailers to offer their full product lines (frequently at discounted prices) on their websites. Adidas was Page 28 of 36 . These companies possessed little or no experience selling goods directly to the consumer market and treaded lightly in their initial forays into ecommerce. the other leading athletic footwear and apparel manufacturers. Reebok and New Balance) had established websites with detailed product information. website and e-commerce operations. however.a common sporting goods e-commerce infrastructure for its multiple retail partners. but not nearly to NIKE·s level of excluding internet retailers from entire product lines. Adidas and Reebok each offered limited product lines at full retail prices to their internet customers. faced similar dilemmas and problems related to their own e-commerce strategies. NIKE·s competitors were generally more willing than NIKE to allow retailers to sell their products over the internet. NIKE·s Direct Competitors NIKE·s competitors. By late 1999. Each competitor. 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. New Balance adopted a hybrid approach. 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. virtually all of NIKE·s major competitors (Adidas. Converse offered no ecommerce functionality or specific information on acquiring its products on-line. GSI claimed to lower drastically the costs associated with electronic commerce. Each retailer collaborated with GSI in decisions related to its brand presentation. they were even more reliant on their traditional retail partners for sales. took a slightly different approach to the strategy and operation of its ecommerce capabilities. Because these competitors were smaller and less powerful than NIKE.

the only difference would be price. NIKE was bombarded with requests from merchants to sell NIKE products on-line. allowing its largest retail Page 29 of 36 . NIKE·S INTERNET STRATEGY Other Internet Sellers (Non-NIKE) As new on-line retailers were created and traditional retailers launched their own internet initiatives.com. focusing on women's sports or chipshot. ESPN.com. In addition to the internet retailers. many sports media concerns were eager to leverage their viewer base into e-commerce customers. the company was extremely hesitant.the only major competitor who had taken a similar position to NIKE.com) and highly specialized niche players (such as lucy. and SportsLine. "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. Initially. a division of Walt Disney Corporation. Each of those companies were making major pushes to convert their website viewers into purchasers." NIKE·s traditional retail partners were anxious to expand into online sales. Pure On-line Start-ups As in many other consumer segments." explained Mary Kate Buckley. These internet endeavors included full-range retailers (such as fogdog.com. worrying that the NIKE brand value would be diluted by careless internet retailers.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. severely restricting sale of product online. but NIKE moved cautiously. 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. selling custom-made golf clubs). "We saw a lot of online retailers who were not putting the right emphasis on product presentation.

com) to sell athletic gear directly to consumers over the internet. Because NIKE handled its own international distribution and managed inventory liquidation through its own outlets. that all those retailers would be able to deliver acceptable service levels. In the summer of 1999. In addition. the company's point had been made to retailers.partners to sell NIKE products on their websites. Some internet sellers were able to acquire NIKE products from other retailers' overstocks and other unofficial channels. 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. NIKE signed a deal with internet sporting goods retailer Fogdog Sports that allowed Fogdog to sell the entire NIKE product line on its website. but Copeland quickly learned that NIKE's concerns were to be taken seriously. explaining that "they were not meeting our marketing standards. NIKE had approved ten of its bricks-and-mortar retail partners to sell NIKE products over the internet.com division) each started selling NIKE products. By the end of 1999. NIKE stopped selling to shopsports. however." Although NIKE resumed sales to shopsports.com. The company was the evolution of a web design and ecommerce Company started in 1994 by three graduates of Stanford Page 30 of 36 . Fogdog Deal In September of 1999. NIKE strictly enforced sales agreements with retailers and actively policed the web for offenders. however. Foot Locker and Copeland Sports (through its shopsports. 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. and continued to monitor their performance carefully. Fogdog Sports was founded in early 1998 (originally as SportSite. the company saw less of these after-market resales than other manufacturers.com shortly thereafter. provided they maintained the same standards enforced at the stores. The company remained unconvinced.

and unusual return privileges." nike. Inc. which relied on NIKE for 40% of their footwear sales. This promise was sure to anger some of NIKE·s most important bricks-and-mortar partners.University. joint promotions. including preferred prices. commented on the channel conflict that NIKE faced: "Our six partners are all among NIKE·s top 20 accounts. In 1998 the company attracted venture capital financing from VenRock Associates and Draper Fisher Jurvetson. the young CEO of GSI. and detailed product information. after negotiations with NIKE had begun. and they need to be on the internet in order to survive in the 21st century. Due to its ownership stake. and information sharing. such as The Athlete·s Foot. like every other internet retailer. only to be rebuffed by NIKE. Different sports received their own separate pages. In September of 1999. including design inspirations and athlete endorsements. for at least six months. Fogdog also received other special considerations from NIKE. product and sales data sharing. Fogdog had repeatedly requested to carry the NIKE product line. with tips and advice from NIKE athletes. In the end.com website was initially launched in August 1996 to provide information and entertaining content to NIKE customers. such as product images for display on the fogdog. formerly VP of Global Sales at NIKE.com website. news and updates on sports events. Fogdog hired Tim Joyce. Fogdog·s pricing policy of respecting manufacturers· recommended minimum prices and reputation was attractive to NIKE. As part of the Fogdog deal. Fogdog was able to point to three years of consistently executing its pricing policy.com The nike. to be its new president. There were no e-commerce capabilities on the site. Page 31 of 36 . Michael Rubin. it reflected a typical NIKE approach to brand building. NIKE agreed not to sell to other virtual retailers including those sites managed by Global Sports. NIKE needs to support them. instead. NIKE had an incentive to make the deal work for both sides and agreed to treat Fogdog like any other major account.

In June of 1999. however. the nike. Nike launched a test to sell its high-end Alpha Project line of footwear and apparel. but I will say we·re on the bruised edge. Over the next twelve months. The June re-launch was the first time the company·s senior management seemed to understand the revolutionary importance of the internet. new information on future product development. all at full retail prices. NIKE made hundreds of its most popular products available for purchase.com·s creative director.Despite the lack of e-commerce and no efforts to drive traffic to the site through advertising expenditures. Bob Lambie.com site logged 14 million visitors in 1998." said nike. NIKE added profiles on NIKE athletes of all levels. NIKE·s website strategy evolved substantially. "I wouldn·t say we·re on the bleeding edge of design technology.rekindling the direct relationship between NIKE and its consumers. Page 32 of 36 . Many of the web functions were so advanced that some consumers were unable to use them all without downloading various plug-ins. A plan to sell posters on the NIKE website was considered for nearly a year before being launched during the Christmas 1998 season. NIKE proceeded with extreme caution on the internet." Despite the significant new push into e-commerce. the website was redesigned to provide a store locator and more detailed product information. NIKE re-launched a completely overhauled and redesigned website. NIKE maintained much of its previous website focus on brand-building and inspirational content. At first. In addition. with greatly expanded e-commerce functionality. 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 -. and innovative new technologies. In February of 1999.

it would alleviate traditional retailers· concerns over unfair competition. 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. UPS agreed to provide warehousing and shipping services as well as a call center with 500 dedicated customer service operators.COM Operational Concerns Running a successful e-commerce business required distinct operational capabilities that NIKE did not possess. Strategic Concerns The new dedication to direct e-commerce over the nike. always concerned about being cannibalized by direct sales. and other related IT areas. Traditional retailers of NIKE products.com website raised significant strategic concerns for NIKE and its partners. tracking delivery. To provide a positive experience for its e-commerce customers. "We are hoping that our website will expand the pie. but NIKE believed it was preferable to doing an inferior job in-house and afforded NIKE the opportunity to learn and gather data. had more reason to worry than ever before as they were denied the opportunity to compete head-tohead with NIKE for internet customers. Rather than building each of those capabilities from scratch. NIKE chose to outsource the new functions to United Parcel Service (UPS). It was uncharacteristic of NIKE to entrust their brand identity to another company. not take market share away from retailers. Because NIKE had no experience with remote order fulfillment.MANAGING NIKE. systems infrastructure. NIKE hoped that by maintaining full retail pricing on its site." explained Mary Page 33 of 36 . NIKE needed vital new skills in web design. In a far-reaching agreement. it lacked any knowledge or expertise in packing and shipping boxes. 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. or customer service.

com. in stark contrast to NIKE·s culture of candor and consensus. NIKE needed to learn manufacturing planning and inventory management to suit uncertain consumer demand rather than pre-determined retailer orders. ´not apologize for it.com created a number of organizational dilemmas that defied easy answers. For products like athletic shoes. the company had to rethink its approach to nearly every core function it performed or managed.com lay in defining a new. Page 34 of 36 . NIKE would have to find creative ways to satisfy customers· desire to know how the products looked and fit. 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. 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.µ said Buckley. 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. Organizational Issues The rapid growth and extraordinary potential of nike. NIKE was concerned about the experience of its e-commerce customers. ´We want to be cognizant of channel conflict. Direct-to-consumer sales also allowed for greater pricing flexibility and forced NIKE to better understand price sensitivity across narrow bands of consumers. more profitable channel for selling shoes and other goods to consumers. 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.µ In addition to the risk of alienating its retailers. with a high "touch-and-feel" component. The media eagerly reported on any new developments and speculated on what the future held for nike. Decisions were made quickly and often secretly. As NIKE considered further expansion into e-commerce. It was hard to see how NIKE could fulfill that need without continuing support from its bricks-and-mortars partners. NIKE understood that the real opportunity for nike. Nevertheless.Kate Buckley.

it retained an aura of distinction within the company. purchase frequency. increasing the effectiveness of its extensive marketing efforts. The sales department helped to ensure that online sales policies were consistent with NIKE·s fundamental standards and policies.com. nike. but also customer shopping habits ² price sensitivity. When nike. The manufacturing department collaborated on plans to produce customized shoes for specific online customers based on individual preferences.com was unable to satisfy the ever-growing roster of internal applicants. At a time of disciplined spending within NIKE.com began reporting directly to Phil Knight in the summer of 1999. NIKE was in a position to directly collect large amounts of customer data. NIKE would have the ability to market new goods or services to exactly the right customers. the online division was seen as having an enviably large budget and a willingness to spend. they became involved in its major strategic decisions. and product bundling. The marketing department assessed every real world advertising campaign to determine how it could best be modified for the on-line world. its stature within the company and in the media increased. NIKE had been extremely successful throughout its history at managing its value chain while only participating in the central Page 35 of 36 . With this information in hand.Once it became clear that nike.com would play an integral role in the future of the company. New Opportunities NIKE's e-commerce operations presented several new opportunities that were not available to NIKE under its old wholesaling model. As other NIKE departments began to realize the fundamental importance of nike. covering not only the demographics of its customer base.\ 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). Despite rapid headcount growth and a preference for internal candidates. it became a vastly larger and more visible department. Nevertheless. For the first time.

and core functions. She began to think about what steps NIKE should take in the year 2000. NIKE had been able to grow dramatically while staying very profitable. Page 36 of 36 . more profitable way of selling products to its loyal consumers. THE FUTURE NIKE understood throughout 1999 that the most important goal was to learn as much as possible about doing business over the internet. More than anything. By not performing either the manufacturing or the selling in-house." At the same time. Buckley understood that the real opportunity for nike. 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. 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.com lay in defining a new. . . Encroaching into the new territory of direct sales presented NIKE with an opportunity to capture more of the value chain than ever before.

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