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Nike’s Organisational Evolution and Replication of Success

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Summary:

The purpose of this research paper is to find the perspectives in organisational science that best explain (A) Nike´s organizational evolution and (B) its ability to replicate success. It is the rational, natural and the open systems perspectives that will be utilized to answer the former, while we focus in-depth on the rational and open systems perspectives in regards to the latter. Our research revealed that Nike´s practices have become more rationalised over time, and that its ability to replicate success thorough discipline and careful study of costumers is explained respectively by the rational and opens systems perspective.

KEYWORDS: Nike, Scott, rational system, natural system, open system

Which perspectives discussed by Scott seem relevant to understand Nike?

Nike (called Blue Ribbon Sports at its inception) was founded in 1964 and has since been through various organizational changes. In the following, several perspectives are going to be discussed in order to understand the company and its development. While all perspectives mentioned by Scott can be used to understand Nike to a certain degree, the perspectives which seem most relevant are (i) Open Rational and (ii) Open Natural mentioned in Scott’s layered model. Nike has exhibited a degree of both perspectives while moving towards a more rational system in recent years.

Nike’s Journey: We are henceforth going to present the case in favour of 1) Nike as an open system and that it has achieved a higher degree of openness with time. 2) Nike’s journey through rational and natural perspectives and how it has increased the degree of rationality with time.

1) Nike in the Open System Perspective
Open systems: “Systems capable of self-maintenance based on throughput of resources from their environment” (Scott & Davis, 2007)
Nike is in an interdependent relationship with its environment, hence making it an open system. For this analysis, the boundaries of this system contain Nike, its employees, and other resources. Its customers, the government, media etc. form a part of the environment. During the early days of Nike´s interaction with the environment involved getting resources from the environment (people and raw materials), marketing to the environment (customers) and selling to customers.

Post late 1990s this interaction has increased even further. In addition to the activities mentioned above, Nike now uses information-systems to gather information from the environment and studies the environment (market segmentation) to predict its behaviour. It has also increased its interaction with the environment by expanding into new markets. Open systems are characterized by morphostasis (stabilizing) and morphogenesis (transformative) processes (Buckley, 1967 cited in Scott & Davis 2007). Examples of morphostatic processes in Nike involve having various departments to help focus on both creative and business side, business functions such as using information systems, logistics and supply chain management and formal ways of addressing unexpected events. The focus on morphostatic processes has increased for Nike post late 1990s. Morphogenetic processes in Nike involve growth and differentiation exhibited through increasing portfolio and movement into new markets. Information systems act as an input to morphogenesis processes.

2a) Nike in the rational perspective
According to the rational system definition, organizations are instruments oriented and coordinated to pursuit a specific goal and that exhibit a relatively high degree of formalization (Scott & Davis, 2007).

1964-1995: Unclear goals and lack of formalisation
Specificity of goals: Nike was still struggling to find a balance between its creative side and business side until 1999. In its early years (1964 – 1990s), Nike executed an aggressive and innovative marketing strategy, which was key to gaining competitive advantage over competitors (apart from the shoes themselves). Even though this could be seen as a clear goal, it was not in congruence with the overall goal of profitability, as excessive promotion activities, such as 1998’s World Cup in Paris, indicate. As opposed to following clearly defined roles in respect to set goals, the culture at Nike encouraged managers to “go flat-out for market share instead of profitability” (Bernstein, 2004, p. 60). Therefore, without clearly defined goals, and a resulting lack of guidelines about how to structure, Nike’s strategy and implementation that was rather intuitive than guided by specific goals.

Formalisation: This was not a given in Nike’s early years, where departments were disjointed, supply-chain management was based on guessing, weak operating principles existed, and financial management being even absent at times. Rules and regulations did not seem to have been precisely formulated. Behavior in the marketing sector, for example, was not standardised or regulated, as the lack of responsibility associated to excessive marketing campaigns indicate. Further, formalization in terms of role definition was lacking, especially in Nike’s financial management, where there was simply no chief financial officer in the late 1990s, resulting in lack of control over the company’s expenses.

1995-2003: Move towards a more rational system
Specificity of goals: With the creation of a new management team, order and discipline were brought to Nike. Nike’s founder Knight was now accompanied with two co-presidents with the intention of achieving a balance between creativity, finances and innovation. Even though not explicitly stated in the article, this development might have brought along a redefinition of Nike’s strategy (and thus its goals), as Nike’s advance after 1999 would suggest. Details of running the business were attained and invested in, such as supply-chain management, and information systems; customer segmentation was emphasised, portfolio brands added, acquisitions made and expanded into new markets. Largely, much in line with Simon’s theory of administrative behaviour (1997), Nike had managed to follow the means-end chain, where the general goal is defined, followed by the identification of a set of means to accomplish this goal, establishing the means’ respective sub-goals and their means. Thus, Nike’s good performance was represented and reinforced by a hierarchy of goals, especially in regard to the company’s creative side and business side.

Formalisation: In 1999, Don Blair became CFO, and a new management team was created. This increased the level of formalization and role specificity at Nike, as they implemented a matrix structure, which broke down managerial responsibility both by region and product. This application of departmentalization is addressed in Fayol’s administrative theory (1949), where activities should be grouped so as to combine homogeneous or related activities within the same organisational unit to improve specialization and thus performance.

2b) Nike in Natural Perspective
Behavioural structures in organizations are of particular interest in the natural systems perspective. This emphasis does not attempt the negation of more formal organizational structures, but rather shows how the high formalization and goal specificity in the rational perspective can be morphed by various informal relations; i.e. as in other social groups (Scott & Davis, 2007, pp. 85-86).

1964-1995: People in the lead
The behaviour of the people at Nikes took precedence over organizational structure in its early days (Bernstein, 2004), with its fast-paced development spearheaded by managers relying more on intuitive decision making than pre-planned ways to reach organizational goals. Neither Phil Knight nor Bill Bowerman seems to have intended this approach, which supports the assumption that these behavioural patterns emerged organically. It even seems like Nikes early successes depended on such artistically minded, risk-prone managers who both broke with conventions in marketing and business more generally (Bernstein, 2004, pp. 56-58). But Nike would henceforth struggle to balance the creative side, a source of innovation, with the more mundane business side in which financial responsibility is essential. While Warren Bennis summarized the rational perspective as “organizations without people” (Scott & Davis, 2007, p. 57), we could equally depict the natural perspective, and especially the early Nike, as “people without organization”.

1995-2003: Balancing act
Nikes later development was characterized by an overhaul of the management system, in which a more formalized organizational structures emerged. James Thompson argue that the natural perspective is best at explaining the managerial level of organizations (Scott & Davis, 2007, p. 109): a reasonable argument considering that it concerns behavioural factors. This managerial level constitutes a bridge between the closed nature of the technical and the very open nature of the institutional level (Scott & Davis, 2007, pp. 110-112). The urge to develop the managerial side of finance and inventory management was acutely expressed by Mark Parker, who actually came from the creative side of Nike (Bernstein, 2004, p. 60); exemplifying a Nike employee pursuing both common and disparate interests.

The thing about Nike´s organisational evolution, that might strike one as a peculiarity, is that it became more rationalized as it matured. Such an evolution might however be more common place than not, considering that behavioural can evolve into normative structures which finally become institutionalized.

Conclusion of Question A
Based on the above arguments we believe that Nike Inc. is an open system which has increased its degree of openness over the years while increasing its focus on rational system attributes to find a balance between creative and business side.

“Nike’s ability to replicate success” is emphasised as important in Zook and Allen’s HBR-article. In which perspectives and theories can this ability be understood and how?

Nike has shown tremendous developments in the past decade. The company’s strategic specification and related organisational shift has led to the belief that nowadays Nike is following a certain formula concerning entering new markets, allowing it to sustain its competitive advantage (Allen, 2003). In the following, Nike’s ability to replicate success will be analysed through the lens of two theories in the field of organisation science: the rational perspective and the open system perspective.

Nike is the leader in the sporting goods industry. In contrast to its competitors, such as Reebok, Nike has succeeded in sustain profitable growth over the years. According to Zook and Allen (2003), this success can partially be explained by an established formula that can be used repetitively. The formula’s repeatability is of special importance, as it allows Nike to systematize growth and take advantage of learning-curve effects.

Zook & Allen (2003) suggest two common characteristics amongst successful repeaters, (1) a high degree of discipline, and (2) careful study of costumers. These two characteristics can be best explained in the framework of an open-rational system, with the former best explained by the rational perspective, and the latter by the open system perspective.

1) Discipline in the rational perspective
In this context of replicating success, discipline can be best understood as well-defined rules about which goal to pursue. Nike operates according to one agreed upon formula, which is applied repetitively; goal specificity is thus highly emphasised. This accounts for Nike’s replication of success, as it assumes a clear growth strategy. Also, the repetitive nature of Nike’s formula allows for learning-curve effects, for a repeatable model allows refinement of skills and processes. Thus Nike’s organisational capability and related success is a result of experience.

Moreover, as a successful repeater, Nike proved to attain only one goal at a time, thus goal specificity is coupled with clearly formulated rules and roles; hence indicating formalisation. A benefit of this is a reduction in complexity, as by holding other variables constant and only changing one thing at a time, Nike managed to expand into new markets, while holding on to its formula and one specific goal.

In addition, Nike’s concentration on one main goal assumes a hierarchy of goals, allowing for prioritisation and effective goal-oriented work, as Simon suggests in his means-end chain (1997). Furthermore, Nike’s formula provides clearly defined sub-goals, sets straight expectations, provides sufficient information and provides a sense of routine, individual decision making is only possible within an environment of ‘givens;’ therefore, bounded rationality is assumed (March & Simon, 1958 cited in Scott & Davis 2007). This concept indicates how Nike’s application of discipline in the shape of a formula combines goal specificity and formalization, and thereby decreasing complexity, increasing speed. Consequently, the rational perspective sheds light on Nike’s discipline in expanding into new markets, which partially explains Nike’s ability to replicate its success.

2) The open system perspective on Nike´s careful study of its costumers
Nikes study of costumers will henceforth be viewed as a symbiotic relationship within an environment where two very negentropic morphogenic processes, globalization and the rise of ICT (Information and Communications Technology), influence Nikes organizational evolution and whether it would adapt to the modern costumer (Allen, 2003).

An organization like Nike is very complicated because materials, energy and information flow within, between, through and outside its boundaries: analogous to biological organisms. Such interdependent relationships are best studied through a rationalistic approach where the whole is more than the sum of the subunits, since reductionism is antithetical to the investigation of such exceedingly complex synergetic phenomena.

Increasing globalisation is on one those synergetic phenomena Nike had to adapt to in order to stay in the game. It is a force that transformed how business operates since an ever increasing number of countries adopted a capitalist market system, i.e. transnational networks became integrated into Nikes value chain, hence making organisational boundaries ever so transitory and amorphous. Costumers henceforth got accustomed to highest-value for lowest-price. Nike used the universal appeal of sports in its marketing, and reflected the restless change in business through aggressive marketing practices. It further segmented its consumers by spreading out from its core business of making state-of-the-art snickers, into clothing and sports equipment; growing share of wallet (Allen, 2003, pp. 67-68).

Another great force that influenced Nikes ability to adapt was the rise of ICT, and it dramatically increased the flow of informational input and output. ICT was beneficial in enabling Nike to straighten up its logistics, supply-chain management, top-flight information systems and hence providing the speed costumers expected. Information flowed between corporations, and the struggle to gain competitive advantage became ever so challenging.

Normal accidents came to challenge Nikes costumer support several times. Case in point is the offshore sweat-shops that are endemic to the modern shoes and clothing industry (Bernstein, 2004, p. 60): balancing consumer desire for low price with CSR (Corporate Social Responsibility). Weick´s three-stage model of sensemaking would argue that environmental changes where constructed into an organization specific, equivocally perceived, framework/lenses through which Nike could not see such CSR deficiencies.(Scott & Davis, 2007, pp. 103-106)

Conclusion of Question B
Nike´s ability to replicate success is explained by both rational perspective and the open system perspective. The former elaborates upon discipline and the latter on a thorough customer study, both being part of Nike’s repeated formula of success.

 

References

Allen, Chris & Zook, James. (2003). Growth Outside the Core Harvard Business Review, 66-73.

Bernstein, Aaron. (2004, 20.9.2004). The New Nike. BusinessWeek, 54-62.

Scott, W. Richard, & Davis, Gerald F. (2007). Organizations and Organizing – Rational, Natural, and Open System Perspectives. New Jersey: Pearson Education.

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