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Research a top multinational company in the world including its international strategy over the last 10 years. Using your research, write a report explaining its strategy, including a discussion of the following questions:

  1. How do management practices, HR policies, and strategy decisions differ between multinational companies and local companies?
  2. Identify some cultural, legal, political, and financial issues this multinational company may have based on their environment.
  3. What sort of international orientation does it have?
  4. Do you think it is ethno-, poly-, or geocentric?
  5. What were the decision factors for the locations it chose to expand in?
  6. Did it have the core capabilities to succeed in those markets?
    1. Think about its objectives, how it chose its countries, what opportunities and constraints were apparent at the time, and what it needed to do to succeed in those markets.
  7. If you were going to compete with this company what would you use as an international marketing entry strategy (licensing, franchising, exporting, joint ventures, etc.) and justify your answer
  8. Define what a value chain dispersal and integration strategy is, and then describe how the strategy is organized around it.

The files should help with the report Thank you in advance.

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CASE: P-54 DATE: 11/15/06 GOOGLE IN CHINA “It’s an imperfect world, we had to make an imperfect choice.” Elliot Schrage, Google vice president for global communications and public affairs. INTRODUCTION Using servers located in the United States, Google began offering a Chinese-language version of Google.com in 2000. The site, however, was frequently unavailable or slow because of censoring by the Chinese government. Google obtained a significant share of searches in China but lagged behind market leader Baidu.com. To achieve commercial success, Google concluded that it was imperative to host a website from within China. Given its motto, “Don’t Be Evil,” Google had to decide whether to operate from within China or to continue to rely on Google.com. If it decided to establish operations in China, the company had to decide how to deal with the censorship imposed by the Chinese government. As a result of an extensive debate within the company, cofounder Serge Brin explained their decision: “We gradually came to the realization that we were hurting not just ourselves but the Chinese people.”1 Google decided to establish the site Google.cn, but without features that allowed users to provide content. To avoid putting individuals in jeopardy of being arrested, Google offered neither e-mail nor the ability to create blogs, since user-generated material could be seized by the Chinese government. This allowed Google to avoid putting individuals in jeopardy of being arrested. Because it would be required by Chinese law to censor search results associated with sensitive issues, Google decided to place a brief notice at the bottom of a search page when material had been censored, as it did in other countries such as France and Germany which banned the sale of Nazi items. Google planned to exercise self-censorship and developed a list of sensitive items by consulting with third parties and by studying the results of the Chinese government’s Internet filtering. Senior policy counsel Andrew McLaughlin stated, “Google is mindful that governments around the world impose restriction on access to information. In order to operate from China, we have removed some content from the search results available on Google.cn, in response to local law, regulation or policy. While removing search results is 1 San Jose Mercury News, March 3, 2006. Professor David P. Baron prepared this case from public sources as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2006 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business. Google in China P-54 p. 2 inconsistent with Google’s mission, providing no information (or a heavily degraded user experience that amounts to no information) is more inconsistent with our mission.”2 Within a month of offering Google.cn, Google came under criticism from two government-run newspapers in China. The Beijing News criticized the company for not doing enough to block “harmful information.” Referring to Google’s practice of informing users when search results had been censored, the China Business Times wrote in an editorial, “Is it necessary for an enterprise that is operating within the borders of China to constantly tell your customers you are following domestic law?” Both publications claimed that Google was operating as an Internet content provider without a proper license.3 Reporters Without Borders, a Paris-based organization campaigning for freedom of expression, called the establishment of Google.cn “a black day for freedom of expression in China.” It stated: The firm defends the rights of U.S. Internet users before the U.S. government, but fails to defend its Chinese users against theirs. United States companies are now bending to the same censorship rules as their Chinese competitors, but they continue to justify themselves by saying their presence has a long-term benefit. Yet the Internet in China is becoming more and more isolated from the outside world.4 Other activists demanded that Google publish its censorship blacklist in the United States. Internet Censorship in China According to the U.S. State Department, companies offering Internet services were “pressured to sign the Chinese government’s ‘Public Pledge on Self-Discipline for the Chinese Internet Industry.’” Under the agreement, they promised not to disseminate information that “breaks laws or spreads superstition or obscenity” or that “may jeopardize state security and disrupt social stability.”5 Providing Internet services required a license which in turn required not circulating information that “damages the honor or interests of the state” or “disturbs the public order or destroys public stability…”6 Censorship in China involved self-regulation by Internet companies as well as government actions. The government did not provide a list of objectionable subjects—instead companies inferred which topics were out of bounds by observing what the government censors removed. The State Council Information Office also convened weekly meetings with Internet service providers. An American executive explained, “It’s known informally as the ‘wind-blowing meeting’—in other words, which way is the wind blowing. They say: ‘There’s this party 2 The New York Times, January 25, 2006. Washington Post, February 22, 2006. Google shared a license with a Chinese company Ganji.com. This practice was common among foreign Internet firms. 4 The New York Times, January 25, 2006, op. cit. 5 BusinessWeek, January 23, 2006. 6 Clive Thompson, “Google’s China Problem (And China’s Google Problem),” The New York Times Magazine, April 23, 2006. 3 2 Google in China P-54 p. 3 conference going on this week. There are some foreign dignitaries here on this trip.’”7 Xin Ye, a founder of Sohu.com, a Chinese value-added Internet services firm, was asked how hard it was to navigate the censorship system. He said, “I’ll tell you this, it’s not more hard than dealing with Sarbanes and Oxley.”8 Zhao Jing, a political blogger in China, “explained that he knew where the government drew the line. ‘If you talk every day online and criticize the government, they don’t care. Because it’s just talk. But if you organize—even if it’s just three or four people—that’s what they crack down on. It’s not speech; it’s organizing.’”9 In December 2005 Zhao called for a boycott of a newspaper because it had fired an editor. In response, the Chinese government asked Microsoft’s MSN to close Zhao’s blog and Microsoft complied.10 Brooke Richardson of MSN said, “We only remove content if the order comes from the appropriate regulatory authority.”11 Yahoo and MSN, as well as other sites, complied with Chinese law as well as exercising selfcensorship.12 Robin Li, chairman of the Chinese search company Baidu.com, said, “We are trying to provide as much information as possible. But we need to obey Chinese law.”13 Baidu had reached an agreement that allowed the Chinese government to oversee its website and in exchange it avoided the disruptions of service and strict operating rules that plagued foreign Internet companies.14 In 2004 Yahoo provided information to the Chinese government that led to the arrest of the journalist Shi Tao. Shi was subsequently sentenced to 10 years in prison for releasing state secrets on a foreign website. Shi had provided information by e-mail about a Communist party decision. Yahoo general counsel Michael Callahan said the company regretted that action but had no alternative since its Chinese employees could have been arrested on criminal charges for not providing the information to the government. Callahan also said that Chinese law prohibited disclosing how many times the company had provided information on users to the government.15 The agencies that regulated the Internet employed 30,000 people who monitored e-mail, websites, blogs, and chat rooms. Internet cafes were required to use software that stored data on all users. Anyone establishing a blog was required to register with the government. Telephone companies were required to incorporate software that censored text messaging. A key part of the censorship system was the control by the government of all gateways into China. This allowed the censors to block undesired content on websites and restrict Internet search results. Referred to as the Great Firewall of China, routers at China’s nine Internet 7 Clive Thompson, “Google’s China Problem (and China’s Google Problem),” The New York Times Magazine, April 23, 2006. 8 Ibid. 9 Ibid. 10 Microsoft’s blogging servers are located in the United States. Clive Thompson, “Google’s China Problem (and China’s Google Problem),” The New York Times Magazine, April 23, 2006. 11 BusinessWeek, January 23, 2006, op. cit. 12 Yahoo lagged behind other Internet companies in China and in 2005 invested $1 billion for a 40 percent interest in the Chinese company Alibaba.com. Yahoo then turned operating control of Yahoo China over to Alibaba.com. 13 BusinessWeek, January 23, 2006, op. cit. Baidu had a 46.5 percent share of Internet searches in China; Google was second with 26.9 percent. Google had a small stake in Baidu but sold it in June 2006. 14 The New York Times, September 17, 2006. 15 San Jose Mercury News, February 20, 2006. 3 Google in China P-54 p. 4 gateways examined messages and search requests and were programmed to block or censor information. It was this firewall that made accessing Google.com slow or at times unavailable from China. China also blocked certain news sites including the BBC News, Voice of America, Amnesty International, Human Rights in China, and Wikipedia, in addition to any information on the spiritual movement Falun Gong which was banned in China. Search results on terms such as Tiananmen Massacre, Tibet, and Dalai Lama were also suppressed. Censorship was also practiced elsewhere, including at universities. University computer systems and bulletin boards banned certain subjects such as politics, and student monitors directed chatroom conversations away from sensitive subjects to those that helped build a “harmonious society.” Student monitor Hu Yingying said, “We don’t control things, but we don’t want bad or wrong things to appear on the websites. According to our social and educational systems, we should judge what is right and wrong. And as I’m a student cadre, I need to play a pioneering role among other students, to express my opinion, to make stronger my belief in Communism.” Another student, Tang Guochao, said, “A bulletin board is like a family, and in a family, I want my room to be clean and well-lighted, without dirty or dangerous things in it.”16 The censorship system was in a technology race with those attempting to evade it. Bill Xia, who arrived in the United States as a student in the 1990s and subsequently founded Dynamic Internet Technology (DIT), developed software called FreeGate that masks the websites that users visit.17 Companies such as DIT and UltraReach also used software to create new websites to elude the Chinese censors.18 For Voice of America, for example, DIT established uncensored proxy sites that directed users to the real site. DIT and UltraReach sent millions of e-mails a day alerting users to the uncensored sites. The Chinese censors worked to shut down the proxy sites and were often able to close the sites within a few days. The companies then would develop new software to evade the censors. The Chinese government sought to justify its practices. Liu Zhengrong, deputy director of the State Council Information Office’s Internet Affairs Bureau, argued that China’s efforts to keep out “harmful” and “illegal” information were similar to those in Western countries. He said, “If you study the main international practices in this regard you will find that China is basically in compliance. The main purposes and methods of implementing our laws are basically the same.”19 He observed that the New York Times and Washington Post websites deleted content that was illegal or in bad taste. He added, “Our practices are completely consistent with international practices.” He continued, “Many of our practices we got from studying the U.S. experience.”20 He noted, “It is clear that any country’s legal authorities closely monitor the spread of illegal information. We have noted that the U.S. is doing a good job on this front.”21 16 The New York Times, May 9, 2006. Human Rights in China and Radio Free Asia were also DIT clients. 18 Both DIT and UltraReach were said to be connected to the Falun Gong movement. San Jose Mercury News, July 2, 2006. 19 The New York Times, February, 15, 2006. 20 Wall Street Journal, February 15, 2006. 21 The New York Times, February, 15, 2006, op. cit. 17 4 Google in China P-54 p. 5 Liu commented, “No one in China has been arrested simply because he or she said something on the Internet.”22 Reporters Without Borders claimed that 62 Chinese were in prison for “Posting on the Internet articles and criticism of the authorities.”23 Despite the international criticism of Internet censorship in China, it was not clear that the Chinese people were concerned. Kai-Fu Lee, who headed operations for Google in China said, “People are actually quite free to talk about [democracy and human rights in China]. I don’t think they care that much. I think people would say: ‘Hey, U.S. democracy, that’s a good form of government. Chinese government, good and stable, that’s a good form of government. Whatever, as long as I get to go to my favorite website, see my friends, live happily.’”24 Ji Xiaoyin, a junior at Shanghai Normal University, commented, “I don’t think anybody can possibly control any information in the Internet. If you’re not allowed to talk here you just go to another place to talk, and there are countless places for your opinions. It’s easy to bypass the firewalls, and anybody who spends a little time researching it can figure it out.”25 Google’s Perspective In response to criticism that Google should lobby the Chinese government to change its censorship system, CEO Eric E. Schmidt said during a visit to China, “I think it’s arrogant for us to walk into a country where we are just beginning operations and tell that country how to run itself.” He also explained, “We had a choice to enter the country and follow the law. Or we had a choice not to enter the country.” Earlier he had said, “We believe the decision that we made to follow the law in China was absolutely the right one.”26 Speaking at an ethics conference on Internet search at Santa Clara University, Peter Norvig, director of research at Google, commented on the decision not to offer services such as e-mail and blogging in China. “We didn’t want to be in a position to hand over users’ information. … We thought that was just too dangerous….We thought it was very important to keep our users out of jail.”27 Norvig justified Google’s policies in China. “Yes, it’s important to get information about democracy and Falun Gong. They also want to know about outbreaks of bird flu. We thought it was more important to give them this information that they can use even if we have to compromise.”28 Google continued to debate internally whether and how it should operate in China. It also hoped for guidance from the U.S. government and the industry. Norvig said, “We feel that the U.S. government can stand up and make stronger laws, and we feel that corporate America can get together and have stronger principles. We’re supporting efforts on both those fronts. We feel we can’t do it alone.”29 22 San Jose Mercury News, February 20, 2006, op. cit. San Jose Mercury News, July 2, 2006. 24 Clive Thompson, op. cit. 25 The New York Times, May 9, 2006, op. cit. 26 The New York Times, April 13, 2006. 27 San Jose Mercury News, March 1, 2006, and March 3, 2006, op. cit. 28 San Jose Mercury News, March 1, 2006, op. cit. 29 San Jose Mercury News, March 1, 2006, op. cit. 23 5 Google in China P-54 p. 6 Norvig disclosed that Google was not keeping search logs in China. “They don’t have personally identifiable information but they do have IP addresses that are potentially identifiable with an individual.”30 That information was kept in the United States, and China could request that information through the U.S. State Department. Political Pressure in the United States In advance of congressional hearings on China and censorship, the State Department announced the creation of a Global Internet Task Force to decrease censorship and encourage change in other countries. Paula Dobriansky, undersecretary of state for democracy, human rights, and labor, said, “The Internet, especially, can be a liberating force. Topics once politically taboo can become freely discussed, and people can communicate anonymously. We must ensure it does not become a tool of repression.”31 Representative Chris Smith (R-NJ), chairman of the House Subcommittee on Africa, Global Human Rights, and International Operations, introduced the Global Internet Freedom Act that would impose restrictions on U.S. companies operating in China. It included a code of conduct, requiring that e-mail servers be located outside the country, and licensing requirements for the export of technologies that could be used for censorship. Smith held a hearing in which Cisco Systems, Google, Microsoft, and Yahoo testified and were grilled by subcommittee members. Commenting on China’s sophisticated censorship system, Smith said, “It’s an active partnership with both the disinformation campaign and …, and the secret police in China are among the most brutal on the planet. I don’t know if these companies understand that or they’re naïve about it, whether they’re witting or unwitting. But it’s been a tragic collaboration. There are people in China being tortured courtesy of these corporations.”32 The bill was passed by the subcommittee and was sent to full committee for consideration. Representative Tom Lantos (D-CA), leader of the Congressional Human Rights Caucus and a survivor of the Holocaust, said, “These captains of industry should have been developing new technologies to bypass the sickening censorship of government and repugnant barriers to the Internet. Instead, they enthusiastically volunteered for the censorship brigade.”33 In congressional testimony Elliot Schrage, vice president of global communications and public affairs at Google, explained that China was an important market for the company. He said, “It would be disingenuous to say that we don’t care about that because, of course, we do. We are a business with stockholders, and we want to prosper and grow in a highly competitive world. At the same time, acting ethically is a core value for our company, and an integral part of our business culture.”34 30 San Jose Mercury News, March 3, 2006, op. cit. San Jose Mercury News, February 15, 2006, op. cit. 32 Ibid. 33 San Jose Mercury News, February 19, 2006. 34 Wall Street Journal, March 10, 2006. 31 6 Google in China P-54 p. 7 Earlier in 2006 Google had refused to comply with a request from the U.S. government to provide information on Internet search requests.35 The government had asked Google for a random sample of 1 million web addresses and a week’s search requests with any information that could identify the user removed. The information was to be used for a study to show that Internet filters were not sufficient to prevent children from accessing pornographic websites. The Department of Justice sought the information to help revive the 1998 Child Online Protection Act that had been blocked by the Supreme Court and sent to the Court of Appeals for reconsideration. Google strongly objected to the request on privacy grounds and refused to provide the information. The Department of Justice then took Google to court to force it to provide the information. In the court hearing the government substantially scaled back its request, and the judge ordered Google to provide 50,000 random web addresses. The judge also ruled that providing the requested 5,000 random search queries could harm Google through a loss of goodwill among its users.36 In June Brin commented on the criticism Google had received. He said, “We felt that perhaps we could compromise our principles but provide ultimately more information for the Chinese and be a more effective service and perhaps make more of a difference. … Perhaps now the principled approach makes more sense.”37 In July Amnesty International launched a campaign against Internet oppression, mentioning Sun Microsystems, Nortel, Cisco, Yahoo, Google, and Microsoft. Amnesty stated, “Internet companies often claim to be ethically responsible—these pledges will highlight how their cooperation in repression risks making them complicit in human rights abuses and damages their credibility.”38 35 The government also sought similar data from AOL, Microsoft’s MSN, and Yahoo, all of which complied with the request. 36 The judge also stated that the search queries could be within the scope of a subpoena. San Francisco Chronicle, March 18, 2006. 37 San Jose Mercury News, June 7, 2006. 38 Amnesty International, press release, July 20, 2006, www.amnesty.org. 7 Google in China P-54 p. 8 Preparation questions: 1. What principles are relevant for Google’s decision to enter China? Is censorship consistent with Google’s core values? Should compromises be made? 2. Why does the Chinese government censor information so aggressively? 3. Should Google have entered China? 4. Given that Google decided to enter China, should it have offered e-mail and hosted blogs? Should it have restricted its offerings more than it actually did? 5. Are Google’s practices sufficient? What else should it do? 6. Should Google lobby the Chinese government to change its censorship policies? 7. Should Google lobby the U.S. government to develop a policy to guide U.S. Internet companies in China? 8 9-700-047 REV: SEPTEMBER 6, 2002 DEBORA L. SPAR Hitting the Wall: Nike and International Labor Practices Moore: Twelve year olds working in [Indonesian] factories? That’s O.K. with you? Knight: They’re not 12-year-olds working in factories... the minimum age is 14. Moore: How about 14 then? Does that bother you? Knight: No. — Phil Knight, Nike CEO, talking to Director Michael Moore in a scene from documentary film The Big One, 1997. Nike is raising the minimum age of footwear factory workers to 18… Nike has zero tolerance for underage workers. 1 — Phil Knight, 1998 In 1997, Nguyen Thi Thu Phuong died while making sneakers. As she was trimming synthetic soles in a Nike contracting factory, a co-worker’s machine broke, spraying metal parts across the factory floor and into Phuong’s heart. The 23 year-old Vietnamese woman died instantly.2 Although it may have been the most dramatic, Phuong’s death was hardly the first misfortune to hit Nike’s far-flung manufacturing empire. Indeed, in the 1980s and 1990s, the corporation had been plagued by a series of labor incidents and public relations nightmares: underage workers in Indonesian plants, allegations of coerced overtime in China, dangerous working conditions in Vietnam. For a while, the stories had been largely confined to labor circles and activist publications. By the time of Phuong’s death, however, labor conditions at Nike had hit the mainstream. Stories of reported abuse at Nike plants had been carried in publications such as Time and Business Week and students from major universities such as Duke and Brown had organized boycotts of Nike products. Even Doonesbury had joined the fray, with a series of cartoons that linked the company to underage 1 “Nike CEO Phil Knight Announces New Labor Initiatives,” PR Newswire, May 12, 1998. 2 Tim Larimer, “Sneaker Gulag: Are Asian Workers Really Exploited?” Time International, May 11, 1998, p. 30. ________________________________________________________________________________________________________________ Research Associate Jennifer L. Burns prepared this case under the supervision of Professor Debora L. Spar. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2000 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 700-047 Hitting the Wall: Nike and International Labor Practices and exploited Asian workers. Before these attacks, Nike had been widely regarded as one of the world’s coolest and most successful companies. Now Nike, the company of Michael Jordan and Tiger Woods; Nike, the sign of the swoosh and athletic prowess, was increasingly becoming known as the company of labor abuse. And its initial response — “We don’t make shoes” — was becoming harder and harder to sustain.3 Nike, Inc. Based in Beaverton, Oregon, Nike had been a corporate success story for more than three decades. It was a sneaker company, but one armed with an inimitable attitude, phenomenal growth, and the apparent ability to dictate fashion trends to some of the world’s most influential consumers. In the 1970s, Nike had first begun to capture the attention of both trend-setting teenagers and financial observers. Selling a combination of basic footwear and street-smart athleticism, Nike pushed its revenues from a 1972 level of $60,000 to a startling $49 million in just ten years.4 It went public in 1980 and then astounded Wall Street in the mid-1990s as annual growth stayed resolutely in the double digits and revenues soared to over $9 billion. By 1998, Nike controlled over 40% of the $14.7 billion U.S. athletic footwear market. It was also a growing force in the $64 billion sports apparel market, selling a wide range of sport-inspired gear to consumers around the globe.5 What differentiated Nike from its competitors was not so much its shoes as its strategy. Like Reebok and adidas and New Balance, Nike sold a fairly wide range of athletic footwear to a fairly wide range of consumers: men and women, athletes and non-athletes, in markets around the world. Its strategy, though, was path breaking, the product of a relatively simple idea that CEO Phil Knight had first concocted in 1962 while still a student at Stanford Business School. The formula had two main prongs. First, the company would shave costs by outsourcing all manufacturing. There would be no in-house production, no dedicated manufacturing lines. Rather all product would be made by independent contracting factories, creating one of the world’s first “virtual” corporations — a manufacturing firm with no physical assets. Then, the money saved through outsourcing would be poured into marketing. In particular, Knight focussed from the start on celebrity endorsements, using high-profile athletes to establish an invincible brand identity around the Nike name. While other firms had used celebrity endorsements in the past, Nike took the practice to new heights, emblazoning the Nike logo across athletes such as Michael Jordan and Tiger Woods, and letting their very celebrity represent the Nike image. “To see name athletes wearing Nike shoes,” Knight insisted, “was more convincing than anything we could say about them.”6 With the help of the “swoosh,” a distinctive and instantly recognizable logo, Nike became by the 1990s one of the world’s best known brands, as well as a global symbol of athleticism and urban cool. But within this success story lay a central irony that would only become apparent in the late 1990s. While the marketing of Nike’s products was based on selling a high profile fashion item to affluent Americans who only wished they could “Just Do It” as well as Woods or Jordan, the manufacture of these sneakers was based on an arms-length and often uneasy relationship with low-paid, non- 3 The quote is from Martha Benson, Nike’s regional spokeswoman in Asia. See Larimer, p. 30. 4 David B. Yoffie, Nike: A (Condensed), HBS Case 391-238 (Boston: HBS Press, 1991), p. 1. 5 Both figures are for retail sales. Footwear 1999, (North Palm Beach; Athletic Footwear Association, 1999), introduction; Dana Eisman Cohen and Sabina McBride, Athletic Footwear Outlook 1999, (New York: Donaldson, Lufkin & Jenrette, 1998), p. 3. 6 Yoffie, p. 6. 2 Hitting the Wall: Nike and International Labor Practices 700-047 American workers. For according to Knight’s original plan, not only would Nike outsource, but it would outsource specifically to low cost parts of the world. Nike signed its first contracts with Japanese manufacturers but eventually shifted its supply base to firms in South Korea and Taiwan, where costs were lower and production reliable. In 1982, 86% of Nike sneakers came from one of these two countries and Nike had established a large network of suppliers in both nations. But as South Korea and Taiwan grew richer, costs rose and Nike began to urge its suppliers to move their operations to new, lower cost regions. Eager to remain in the company’s good graces, most manufacturers rapidly complied, moving their relatively inexpensive plants to China or Indonesia. By 1990, these countries had largely replaced South Korea and Taiwan as the core of Nike’s global network. Indonesia, in particular, had become a critical location, with six factories that supplied Nike and a booming, enthusiastic footwear industry.7 Taking Care of Business At first, Indonesia seemed an ideal location for Nike. Wages were low, the workforce was docile, and an authoritarian government was yearning for foreign direct investment. There were unions in the country and occasional hints of activism, but the Suharto government clearly was more interested in wooing investors than in acceding to any union demands. So wages stayed low and labor demands were minimal. In 1991, the daily minimum wage in Indonesia’s capital city was barely $1, compared to a typical daily wage of $24.40 in South Korea8 and a U.S. hourly wage in athletic shoe manufacturing of about $8.9 For firms like Nike, this differential was key: according to a reporter for the Far Eastern Economic Review, shoes coming out of China and Indonesia cost roughly 50% less than those sourced from Taiwan and South Korea.10 Just as Nike was settling into its Indonesian operations, though, a rare wave of labor unrest swept across the country. Strikes, which had been virtually nonexistent in the 1980s, began to occur with increasing frequency; according to government figures, there were 112 strikes in 1991,11 a sharp increase from the 19 reported in 1989.12 A series of polemical articles about foreign companies’ labor abuses also appeared in Indonesian newspapers, triggering unprecedented demands from factory workers and empowering a small but potent band of labor organizers. The source of these strikes and articles was mysterious. Some claimed that the Indonesian government was itself behind the movement, trying to convince an increasingly suspicious international community of the country’s commitment to freedom of speech and labor rights. Others saw the hand of outside organizers, who had come to Indonesia solely to unionize its work force and embarrass its foreign investors. And still others saw the outbursts as random eruptions, cracks in the authoritarian veneer which quickly took on a life of their own. In any case, though, the unrest occurred just around the time of Nike’s expansion into Indonesia. In 1991 the Asian-American Free 7 Philip M. Rosenzweig and Pam Woo, International Sourcing in Footwear: Nike and Reebok, HBS Case 394-189 (Boston: HBS Press, 1994), pp. 2 - 5. 8 Elliot B. Smith, “K-Swiss in Korea,” California Business, October 1991, p. 77. 9 Rosenzweig and Woo, p. 3. 10 Mark Clifford, “Pain in Pusan,” Far Eastern Economic Review, November 5, 1992, p. 59. 11 Suhaini Aznam, “The Toll of Low Wages,” Far Eastern Economic Review, April 2, 1992, p. 50. 12 Margot Cohen, “Union of Problems: Government Faces Growing Criticism on Labour Relations,” Far Eastern Economic Review, August 26, 1993, p. 23. 3 700-047 Hitting the Wall: Nike and International Labor Practices Labor Association (AAFLI, a branch of the AFL-CIO) published a highly critical report on foreign companies in Indonesia. Later that year, a group of Indonesian labor economists at the Institut Teknology Bandung (ITB), issued a similar report, documenting abusive practices in Indonesian factories and tracing them to foreign owners. In the midst of this stream of criticism was a labor organizer with a deep-seated dislike for Nike and a determination to shape its global practices. His name was Jeff Ballinger. The Role of Jeff Ballinger A labor activist since high school, Ballinger felt passionately that any company had a significant obligation towards even its lowliest workers. He was particularly concerned about the stubborn gap between wage rates in developed and developing worlds, and about the opportunities this gap created for rich Western companies to exploit low-wage, politically repressed labor pools. In 1988, Ballinger was assigned to run the AAFLI office in Indonesia, and was charged with investigating labor conditions in Indonesian plants and studying minimum wage compliance by overseas American companies. In the course of his research Ballinger interviewed workers at hundreds of factories and documented widespread worker dissatisfaction with labor conditions. Before long, Nike emerged as a key target. Ballinger believed that Nike’s policy of competing on the basis of cost fostered and even encouraged contractors to mistreat their workers in pursuit of unrealistic production quotas. Although Indonesia had worker protection legislation in place, widespread corruption made the laws essentially useless. While the government employed 700 labor inspectors, Ballinger found that out of 17,000 violations reported in 1988, only 12 prosecutions were ever made. Bribery took care of the rest.13 Nike contractors, in particular, he believed, were regularly flouting Indonesian labor laws and paying below-subsistence wages that did not enable workers to meet their daily requirements for food and other necessities. And to top matters off, he found Nike’s attitude in the face of these labor practices galling: “It was right around the time that the swoosh started appearing on everything and everyone,” Ballinger remembered. “Maybe it was the swagger that did it.”14 What also “did it,” though, was Ballinger’s own strategic calculation — a carefully crafted policy of “one country-one company.” Ballinger knew that his work would be effective only if it was carefully focused. And if his goal was to draw worldwide attention to the exploitation of third-world factory workers by rich U.S. companies, then Nike made a nearly ideal target. The arithmetic was simple. The same marketing and branding power that drove Nike’s bottom line could also be used to drive moral outrage against the exploitation of Asian workers. After the publication of his AAFLI report, Ballinger set out to transform Nike’s competitive strength into a strategic vulnerability. For several years he worked at the fringes of the activist world, operating out of his in-laws’ basement and publishing his own newsletter on Nike’s practices. For the most part, no one really noticed. But then, in the early 1990s Ballinger’s arguments coincided with the strikes that swept across Indonesia and the newfound interest of media groups. Suddenly his stories were big news and both the Indonesian government and U.S. firms had begun to pay attention. 13 Interview with casewriter, Cambridge, MA, July 6, 1999. 14 Ibid. 4 Hitting the Wall: Nike and International Labor Practices 700-047 Early Changes The first party to respond to criticism from Ballinger and other activists was the government itself. In January 1992 Indonesia raised the official minimum daily wage from 2100 rupiah to 2500 rupiah (US$1.24). According to outside observers, the new wage still was not nearly enough: it only provided 70% of a worker’s required minimal physical need (as determined by the Indonesian government) and was further diluted by the way in which many factories distributed wages and benefits.15 The increased wage also had no impact on “training wages,” which were lower than the minimum wage and often paid long after the training period had expired. Many factories, moreover, either ignored the new wage regulations or successfully petitioned the government for exemption. Still, the government’s actions at least demonstrated some willingness to respond. The critics took note of this movement and continued their strikes and media attacks. Despite the criticism, Nike insisted that labor conditions in its contractors’ factories were not — could not — be Nike’s concern or its responsibility. And even if labor violations did exist in Nike’s contracting factories, stated the company’s general manager in Jakarta, “I don’t know that I need to know.”16 Nike’s company line on the issue was clear and stubborn: without an inhouse manufacturing facility, the company simply could not be held responsible for the actions of independent contractors. Realizing the severity of the labor issue, though, Nike did ask Dusty Kidd, a newly-hired member of its public relations department, to draft a series of regulations for its contractors. In 1992, these regulations were composed into a Code of Conduct and Memorandum of Understanding and attached to the new contracts sent to Nike contractors. In the Memorandum, Nike addressed seven different aspects of working conditions, including safety standards, environmental regulation and worker insurance. It required its suppliers to certify they were following all applicable rules and regulations and outlined general principles of honesty, respect, and non-discrimination. Meanwhile, other shoe companies had been facing similar problems. Reebok, a chief competitor of Nike, also sourced heavily from Indonesia and South Korea. Like Nike, it too had been the subject of activist pressure and unflattering media. But unlike Nike, Reebok had moved aggressively into the human rights arena. In 1988, it created the Reebok Human Rights Award, bestowed each year on youthful contributors to the cause of human rights, and in 1990 it adopted a formal human rights policy.17 When activists accused the company of violating workers’ rights in Indonesia, Reebok responded with a far-reaching set of guidelines, one that spoke the explicit language of human rights, set forth specific standards for the company’s contractors and promised to audit these contractors to ensure their compliance.18 It was a big step for an American manufacturer and considerably farther than Nike had been willing to go. Into the Spotlight By 1992, criticism of Nike’s labor practices had begun to seep outside of Indonesia. In the August issue of Harper’s magazine, Ballinger published an annotated pay-stub from an Indonesian factory, 15A factory, for example, could pay a base wage lower than 2500 rupiah, but bring total compensation up to legal levels by the addition of a food allowance and incentive payments (see Aznam, p. 50). 16 Adam Schwarz, “Running a Business,” Far Eastern Economic Review, June 20, 1991, p. 16. 17 Rosenzweig and Woo, p. 7. 18 Ibid., pp. 16-17. 5 700-047 Hitting the Wall: Nike and International Labor Practices making the soon-to-be famous comparison between workers’ wages and Michael Jordan’s endorsement contract. He noted that at the wage rates shown on the pay stub, it would take an Indonesian worker 44, 492 years to make the equivalent of Jordan’s endorsement contract.19 Then the Portland Oregonian, Nike’s hometown newspaper, ran a series of critical articles during the course of the 1992 Barcelona Olympics. Also at the Olympics, a small band of protestors materialized and handed out leaflets that charged Nike with exploitation of factory workers. The first mainstream coverage of the issue came in July 1993, when CBS interviewed Indonesian workers who revealed that they were paid just 19¢ an hour. Women workers could only leave the company barracks on Sunday, and needed a special letter of permission from management to do so. Nike responded somewhat more forcefully to this next round of allegations, hiring accounting firm Ernst & Young to conduct formal audits of its overseas factories. However, because Ernst & Young was paid by Nike to perform these audits, activists questioned their objectivity from the start. Public criticism of Nike’s labor practices continued to mount. Then suddenly, in 1996, the issue of foreign labor abuse acquired a name and a face: it was Kathie Lee Gifford, a popular daytime talk show host. In April human rights activists revealed that a line of clothing endorsed by Gifford had been manufactured by child labor in Honduras. Rather than denying the connection Gifford instantly rallied to the cause. When she appeared on television, crying and apologetic, a wave of media coverage erupted. Or as Ballinger recalls, “That’s when my phone really started ringing.”20 Although Nike was not directly involved in the Gifford scandal, it quickly emerged as a symbol of worker exploitation and a high-profile media scapegoat. Child labor was the first area of concern. In July, Life magazine ran a story about child labor in Pakistan, and published a photo of a 12 year old boy stitching a Nike soccer ball.21 Then Gifford herself publicly called upon fellow celebrities such as Michael Jordan to investigate the conditions under which their endorsed products were made and to take action if need be. Jordan brushed away suggestions that he was personally responsible for conditions in Nike factories, leaving responsibility to the company itself. When Nike refused to let Reverend Jesse Jackson tour one of its Indonesian factories the media jumped all over the story, noting by contrast that Reebok had recently flown an executive to Indonesia just to give Jackson a tour. At this point, even some pro-business observers began to jump on the bandwagon. As an editorial in Business Week cautioned: “Too few executives understand that the clamor for ethical sourcing isn’t going to disappear with the wave of a magic press release. They have protested, disingenuously, that conditions at factories run by subcontractors are beyond their control... Such attitudes won’t wash anymore. As the industry gropes for solutions,” the editorial concluded, “Nike will be a key company to watch.”22 The View From Washington Before long, the spotlight on the labor issue extended all the way to Washington. Sensing a hot issue, several senators and representatives jumped into the action and began to suggest legislative 19 Jeff Ballinger, “The New Free-Trade Heel,” Harper’s Magazine, August 1992, p. 64. 20 Casewriter interview. 21 Nike’s vigorous protests stopped the magazine from running the photo on its cover. Nike convincingly argued that the photo was staged, because the ball was inflated so that the Nike “swoosh” was clearly visible. In fact, soccer balls are stitched while deflated. However, the company did admit it had inadvertently relied on child labor during its first months of production in Pakistan. 22 Mark L. Clifford, “Commentary: Keep the Heat on Sweatshops,” Business Week, December 23, 1996, p. 90. 6 Hitting the Wall: Nike and International Labor Practices 700-047 solutions to the issue of overseas labor abuse. Representative George Miller (D-CA) launched a campaign aimed at retailers that would mandate the use of “No Sweat” labels to guarantee that no exploited or child labor had been employed in the production of a garment. “Parents,” he proclaimed, “have a right to know that the toys and clothes they buy for their children are not made by exploited children.” To enforce such guarantees, Miller added, “I think Congress is going to have to step in.”23 On the heels of this public outcry, President Clinton convened a Presidential task force to study the issue, calling on leaders in the apparel and footwear industries to join and help develop acceptable labor standards for foreign factories. Known as the Apparel Industry Partnership (AIP), the coalition, which also included members of the activist, labor, and religious communities, was meant to be a model collaboration between industry and its most outspoken critics, brokered by the U.S. government. Nike was the first company to join. In order to supplement its hiring of Ernst & Young, in October 1996 Nike also established a Labor Practices Department, headed by former public relations executive Dusty Kidd. In a press release, Knight announced the formation of the new department and praised Nike’s recent initiatives regarding fair labor practices, such as participation in Clinton’s AIP, membership in the organization Business for Social Responsibility, and an ongoing dialogue with concerned non-governmental organizations (NGOs). “Every year we continue to raise the bar,” said Knight. “First by having Ernst & Young audits, and now with a group of Nike employees whose sole focus will be to help make things better for workers who make Nike products. In labor practices as in sport, we at Nike believe ‘There is No Finish Line.’”24 And indeed he was right, for the anti-Nike campaign was just getting started. The Hotseat As far as public relations were concerned, 1997 was even worse for Nike than 1996. Much as Ballinger had anticipated, Nike’s giant marketing machine was easily turned against itself and in a climate awash with anti-Nike sentiment, any of Nike’s attempts at self promotion became easy targets. In 1997 the company began expanding its chain of giant retail stores, only to find that each newly opened Niketown came with an instant protest rally, complete with shouting spectators, sign waving picketers, and police barricades. Knowing a good story when they saw it, reporters eagerly dragged Nike’s celebrity endorsers into the fracas. Michael Jordan was pelted with questions about Nike at press conferences intended to celebrate his athletic performance, and football great Jerry Rice was hounded to the point of visible agitation when he arrived at the grand opening of a new Niketown in San Francisco.25 Perhaps one of the clearest indicators that Nike was in trouble came in May 1997, when Doonesbury, the popular comic strip, devoted a full week to Nike’s labor issues. In 1,500 newspapers, millions of readers watched as Kim, Mike Doonesbury’s wife, returned to Vietnam and found a long-lost cousin laboring in dismal conditions at a Nike factory. The strips traced Kim’s growing involvement in the activist movement and the corrupt factory manager’s attempts to deceive her about true working conditions in Nike contracting factories. In Doonesbury, Nike had reached an unfortunate cultural milestone. As one media critic noted: “It’s sort of like getting in Jay Leno’s monologue. It means your perceived flaws have reached a critical mass, and everyone feels free to 23 “Honduran Child Labor Described,” The Boston Globe, May 30, 1996, p. 13. 24 “Nike Establishes Labor Practices Department,” PR Newswire, October 2, 1996. 25 “Protestors Swipe at the Swoosh, Catch Nike’s Jerry Rice Off Guard,” The Portland Oregonian, Feburary 21, 1997, p. C1. 7 700-047 Hitting the Wall: Nike and International Labor Practices pick on you.”26 The appearance of the Doonesbury strips also marked the movement of anti-Nike sentiment from the fringes of American life to the mainstream. Once the pet cause of leftist activists, Nike bashing had become America’s newest spectator sport. Even some of the company’s natural friends took a dim view of its actions. The Wall Street Journal ran an opinion piece alleging that “Nike Lets Critics Kick it Around.” The writer argued that Nike had been “its own worst enemy” and that its public relations efforts had only made the problem worse. According to the writer, had Nike acknowledged its wrongdoing early on and then presented economic facts that showed the true situation of the workers, the crisis would have fizzled.27 Instead it had simply gathered steam. Even more trouble loomed ahead with the anticipated release of The Big One, a documentary film by Michael Moore that was widely expected to be highly critical of Nike’s labor practices. Damage Control Late in 1996 the company decided to turn to outside sources, hiring Andrew Young, the respected civil rights leader and former mayor of Atlanta, to conduct an independent evaluation of its Code of Conduct. In January 1997, Knight granted Young’s newly-formed GoodWorks International firm “blanket authority … to go anywhere, see anything, and talk with anybody in the Nike family about this issue.”28 Shortly thereafter Young went to Asia, visited Nike suppliers and returned to issue a formal report. On the day the report was released, Nike took out full-page advertisements in major newspapers that highlighted one of Young’s main conclusions: “It is my sincere belief that Nike is doing a good job... But Nike can and should do better.”29 Young did not give Nike carte blanche with regard to labor practices. Indeed, he made a number of recommendations, urging Nike to improve their systems for reporting workers’ grievances, to publicize their Code more widely and explain it more clearly, and to implement cultural awareness and language training programs for expatriate managers. Young also stated that third party monitoring of factories was necessary, but agreed that it was not appropriate for Nike’s NGO critics to fulfill that function. Rather than calming Nike’s critics, though, Young’s report had precisely the opposite effect. Critics were outraged by the report’s research methodology and conclusions, and unimpressed by Young’s participation. They argued that Young had failed to address the issue of factory wages, which was for many observers the crux of the issue, and had spent only 10 days interviewing workers. During these interviews, moreover, Young had relied on translators provided by Nike, a major lapse in accepted human rights research technique. Finally, critics also noted that the report was filled with photos and used a large, showy typeface, an unusual format for a research report. From the start, Nike executives had argued in vain that they were the target of an uninformed media campaign, pointing out that although Nike was being vigorously monitored by activists and the media, no one was monitoring the monitors. This point was forcefully made by the publication of a five page New Republic article in which writer Stephen Glass blasted the Young report for factual inaccuracies and deception, and summed up: “This was a public relations problem, and the world’s 26 Jeff Manning, “Doonesbury Could Put Legs on Nike Controversy,” The Portland Oregonian, May 25, 1997, p. D01. 27 Greg Rushford, “Nike Lets Critics Kick it Around,” The Wall Street Journal, May 12, 1997, p. A14. 28 Andrew Young, Report: The Nike Code of Conduct, (GoodWorks International, LLC, 1997) p. 27. 29 Young, p. 59. 8 Hitting the Wall: Nike and International Labor Practices 700-047 largest sneaker company did what it does best: it purchased a celebrity endorsement.”30 Glass’s claims were echoed by several other media outlets that also decried Nike’s disingenuousness and Young’s ineptitude. However, within months a major scandal erupted at the New Republic when it was discovered that most of Glass’s articles were nearly fictional. Apparently, Glass routinely quoted individuals with whom he had never spoken or who did not even exist, and relied upon statistics and information from organizations he invented himself. The Issue of Wages In the public debate, the question of labor conditions was largely couched in the language of human rights. It was about child labor, or slave labor, or workers who toiled in unsafe or inhumane environments. Buried beneath these already contentious issues, though, was an even more contentious one: wages. According to many labor activists, workers in the developing world were simply being paid too little — too little to compensate for their efforts, too little compared to the final price of the good they produced, too little, even, to live on. To many business economists, though, such arguments were moot at best and veiled protectionism at worst. Wages, they maintained, were simply set by market forces: by definition, wages could not be too low, and there was nothing firms could or should do to affect wage rates. As the debate over labor conditions evolved, the argument over wages had become progressively more heated. Initially, Nike sought to defuse the wage issue simply by ignoring it, or by reiterating the argument that this piece of the labor situation was too far beyond their control. In the Young Report, therefore, the issue of wages was explicitly set aside. As Young explained in his introduction: “I was not asked by Nike to address compensation and ‘cost of living’ issues which some in the human rights and NGO community had hoped would be a part of this report.” Then he went on: “Are workers in developing countries paid far less than U.S. workers? Of course they are. Are their standards of living painfully low by U.S. standards? Of course they are. This is a blanket criticism that can be leveled at almost every U.S. company that manufactures abroad... But it is not reasonable to argue that any one particular U.S. company should be forced to pay U.S. wages abroad while its direct competitors do not.”31 It was a standard argument, and one that found strong support even among many pro-labor economists. In the heat of public debate, however, it registered only as selfserving. The issue of wages emerged again in the spring of 1997, when Nike arranged for students at Dartmouth’s Amos Tuck School of Business to conduct a detailed survey on “the suitability of wages and benefits paid to its Vietnamese and Indonesian contract factory workers.”32 Completed in November 1997, the students’ Survey of Vietnamese and Indonesian Domestic Expenditure Levels was a 45 page written study with approximately 50 pages of attached data. The authors surveyed both workers and residents of the areas in which the factories were located to determine typical spending patterns and the cost of basic necessities. 30 Stephen Glass, “The Young and the Feckless,” The New Republic, September 8, 1997, p. 22. 31 Young, p. 9-11. 32 Derek Calzini, Shawna Huffman, Jake Odden, Steve Tran, and Jean Tsai, Nike, Inc: Survey of Vietnamese and Indonesian Domestic Expenditure Levels, November 3, 1997, Field Study in International Business (Dartmouth, NH: The Amos Tuck School, 1997), p. 5. 9 700-047 Hitting the Wall: Nike and International Labor Practices In Vietnam, the students found that “The factory workers, after incurring essential expenditures, can generate a significant amount of discretionary income.”33 This discretionary income was often used by workers to purchase special items such as bicycles or wedding gifts for family members. In Indonesia, results varied with worker demographics. While 91% of workers reported being able to support themselves individually, only 49% reported being able to also support their dependents. Regardless of demographic status, 82% of workers surveyed in Indonesia either saved wages or contributed each month to their families.34 Additionally, the survey found that most workers were not the primary wage earners in their households. Rather, in Vietnam at least, factory wages were generally earned by young men or women and served “to augment aggregate household income, with the primary occupation of the household parents being farming or shopkeeping.”35 The same was often true in Indonesia. For instance, in one Indonesian household the students visited, a family of six had used one daughter’s minimum wage from a Nike factory to purchase luxury items such as leather couches and a king sized bed.36 While workers in both countries managed to save wages for future expenditure, the authors found that Indonesians typically put their wages in a bank, while Vietnamese workers were more likely to hold their savings in the form of rice or cows. Economically, data such as these supported the view that companies such as Nike were actually furthering progress in the developing countries, providing jobs and wages to people who formerly had neither. In the public view, however, the social comparison was unavoidable. According to the Tuck study, the average worker in a Vietnamese Nike factory made about $1.67 per day. A pair of Penny Hardaway basketball sneakers retailed at $150. The criticism continued to mount. In November there was even more bad news. A disgruntled Nike employee leaked excerpts of an internal Ernst & Young report that uncovered serious health and safety issues in a factory outside of Ho Chi Minh City. According to the Ernst & Young report, a majority of workers suffered from a respiratory ailment caused by poor ventilation and exposure to toxic chemicals. The plant did not have proper safety equipment and training, and workers were forced to work 15 more hours than allowed by law. But according to spokesman Vada Manager the problems no longer existed: “This shows our system of monitoring works. We have uncovered these issues clearly before anyone else, and we have moved fairly expeditiously to correct them.”37 Once again, the denial only made the criticism worse. Hitting the Wall Fiscal Year 1998 Until the spring of 1997, Nike sneakers were still selling like hotcakes. The company’s stock price had hit $76 and futures orders reached a record high. Despite the storm of criticism lobbied against it, Nike seemed invincible. 33 Ibid., p. 8. 34 Ibid., p. 9. 35 Ibid., p. 31. 36 Ibid., p. 44. 37 Tunku Varadarajan, “Nike Audit Uncovers Health Hazards at Factory,” The Times of London, November 10, 1997, p. 52. 10 Hitting the Wall: Nike and International Labor Practices 700-047 Just a year later, however, the situation was drastically different. As Knight admitted to stockholders, Nike’s fiscal year 1998 “produced considerable pain.” In the third quarter 1998, the company was beset by weak demand and retail oversupply, triggered in part by the Asian currency crisis. Earnings fell 69%, the company’s first loss in 13 years. In response, Knight announced significant restructuring charges and the layoff of 1,600 workers.38 Much the same dynamic that drove labor criticism drove the 1998 downturn: Nike became a victim of its own popularity. Remarked one analyst: “When I was growing up, we used to say that rooting for the Yankees is like rooting for U.S. Steel. Today, rooting for Nike is like rooting for Microsoft.”39 The company asserted that criticism of Nike’s labor practices had nothing to do with the downturn. But it was clear that Nike was suffering from a serious image problem. For whatever reasons, Americans were sick of the swoosh. Although Nike billed its shoes as high performance athletic gear, it was well known that 80% of its shoes were sold for fashion purposes. And fashion was a notoriously fickle patron. Competing sneaker manufacturers, particularly adidas, were quick to take advantage of the giant’s woes. Adidas’ three-stripe logo fast replaced Nike’s swoosh among the teen trendsetter crowd; rival brands New Balance and Airwalk tripled their advertising budgets and saw sales surge. To make matters worse, the anti-Nike headlines had trickled down to the nation’s campuses, where a newly invigorated activist movement cast Nike as a symbol of corporate greed and exploitation. With its roots deep in the University of Oregon track team (Knight had been a long distance runner for the school), Nike had long treasured its position as supplier to the top athletic universities. Now, just as young consumers were choosing adidas over Nike at the cash register, campus activists rejected Nike’s contracts with their schools and demanded all contracts cease until labor practices were rectified. In late 1997, Nike’s $7.2 million endorsement deal with the University of North Carolina sparked protests and controversy on campus; in early 1998 an assistant soccer coach at St. John’s University, James Keady, publicly quit his job rather than wear the swoosh. “I don’t want to be a billboard for a company that would do these things,” said Keady. 40 Before long, the student protests spread to campuses where Nike had no merchandising contracts. Organized and trained by unions such as UNITE! and the AFL-CIO, previously apathetic college students stormed university buildings to protest sweatshop labor and the exploitation of foreign workers. In 1999, activists took over buildings at Duke, Georgetown, the University of Michigan and the University of Wisconsin, and staged sit-ins at countless other colleges and universities. The protests focused mostly on the conditions under which collegiate logo gear was manufactured. Declared Tom Wheatley, a Wisconsin student and national movement leader: “It really is quite sick. Fourteen-year-old girls are working 100-hour weeks and earning poverty-level wages to make my college T-shirts. That’s unconscionable.”41 University administrators heeded the student protests, and many began to consider codes of conduct for contract manufacturers. 38 Nike Corporation, Annual Report 1998, (Nike, Inc.: Beaverton, OR) p. 1, 17-30. 39 Quoted in Patricia Sellers, “Four Reasons Nike’s Not Cool,” Fortune, March 30, 1998, p. 26. 40 William McCall, “Nike’s Image Under Attack: Sweatshop Charges Begin to Take a Toll on the Brand’s Cachet,” The Buffalo News, October 23, 1998, p. 5E. 41 Nancy Cleeland, “Students Give Sweatshop Fight the College Try,” Los Angeles Times, April 22, 1999, p. C1. 11 700-047 Hitting the Wall: Nike and International Labor Practices Saving the Swoosh Nike’s fiscal woes did what hundreds of harsh articles had failed to do: they took some of the bravado out of Phil Knight. In a May 1998 speech to the National Press Club, a humbled Knight admitted that “the Nike product has become synonymous with slave wages, forced overtime, and arbitrary abuse.”42 Knight announced a series of sweeping reforms, including raising the minimum age of all sneaker workers to 18 and apparel workers to 16; adopting U.S. OSHA clean air standards in all its factories; expanding its monitoring program; expanding educational programs for workers; and making micro loans available to workers. Although Nike had been formally addressing labor issues since 1992, Knight’s confession marked a turning point in Nike’s stance towards its critics. For the first time, he and his company appeared ready to shed their defensive stance, admit labor violations did occur in Nike factories, and refashion themselves as leaders in the effort to reform third world working conditions. Nike’s second step was to get more involved with Washington-based reform efforts. In the summer of 1998, President Clinton’s initial task force on labor, the Apparel Industry Partnership (AIP), lay deadlocked over the ever-delicate issues of factory monitoring and wages. Although the AIP had a tentative proposal, discussion ground to a halt when the task force’s union, religious, and corporate members clashed. While the AIP proclaimed itself as an exemplar of cooperative solution making, it soon became apparent that its members had very different views. One key concept — “independent monitoring” — was highly contentious. To Nike, the hiring of a separate and unrelated multinational firm like Ernst & Young fulfilled any call for independent monitoring. But activists and other critics alleged that if an independent monitor, such as an accounting firm, was hired by a corporation, it thereby automatically lost autonomy and independence. According to such critics, independent monitoring could only be done by an organization that was not on a corporate payroll, such as an NGO or a religious group. The corporations, by contrast, insisted that a combination of internal monitoring and audits by accounting firms was sufficient. Upset at what they saw as corporate intransigence, the task force’s union and religious membership abruptly exited the coalition. The remaining corporate members of the AIP were soon able to cobble together a more definitive agreement, complete with an oversight organization known as the Fair Labor Association (FLA). The FLA was to be a private entity controlled evenly by corporate members and human rights or labor representatives (if they chose to rejoin the coalition). It would support a code of conduct that required its members to pay workers the legal minimum wage or the prevailing local standard, whichever was higher. The minimum age of workers was set at 15, and employees could not be required to work more than 60 hours per week. Companies that joined the Association would be required to comply with these guidelines and to establish internal monitoring systems to enforce them; they would then be audited by certified independent inspectors, such as accounting firms. In the first three years after a company joined, auditors would inspect 30% of a company’s factories; later they would inspect 10%. All audits would be confidential. Nike worked tirelessly to bring other manufacturers into the FLA, but the going was tough. As of August 1999, the only other corporate members were adidas, Liz Claiborne, Reebok, Levi’s, L.L. Bean, and Phillips Van Heusen. However, Nike’s efforts to foster the FLA hit pay dirt with U.S. colleges and universities. The vocal student anti-sweatshop movement had many administrators scrambling to find a solution, and over 100 colleges and universities eventually signed on. 42 John H. Cushman Jr., “Nike to Step Forward on Plant Conditions,” The San-Diego Union-Tribune, May 13, 1998, p. A1. 12 Hitting the Wall: Nike and International Labor Practices 700-047 Participants ranged from the large state universities that held Nike contracts to the eight Ivy League schools. The FLA was scheduled to be fully operational by the fall of 2000. Meanwhile, by 1999 Nike was running extensive training programs for its contractors’ factory managers. All managers and supervisors were required to learn the native language of their workers, and received training in cultural differences and acceptable management styles. In addition to 25 employees who would focus solely on corporate responsibility, Nike’s 1,000 production employees were explicitly required to devote part of their job to maintaining labor standards. In Vietnam, the company partnered with the National University of Vietnam in a program designed to identify and meet worker needs. It also helped found the Global Alliance, a partnership between the International Youth Foundation, the MacArthur Foundation, the World Bank, and Mattel, that was dedicated to improving the lives of workers in the developing world. Although Nike’s various concessions and new programs were welcomed as a victory by several human rights groups, other observers argued that Nike still failed to deal with the biggest problem, namely wages.43 Wrote New York Times columnist Bob Herbert: “Mr. Knight is like a three-card monte player. You have to keep a close eye on him at all times. The biggest problem with Nike is that its overseas workers make wretched, below-subsistence wages. It’s not the minimum age that needs raising, it’s the minimum wage.”44 Similarly, while some labor leaders accepted the FLA as the best compromise possible, others decried it as sham agreement that simply provided cover for U.S. corporations. A main objection of these critics was that the FLA standards included notification of factories that were to be inspected, a move criticized by some as equivalent to notifying a restaurant when a critic was coming to dine. According to Jeff Ballinger, Nike’s original critic, the company’s reform record was mixed. Ballinger was confident that Nike had at least removed dangerous chemicals from factories, but otherwise he remained skeptical: “If you present yourself as a fitness company you can’t very well go around the globe poisoning people. But on wages, they’re still lying through their teeth.”45 43 John H. Cushman, Jr., “Nike Pledges to End Child Labor and Apply U.S. Rules Abroad,” The New York Times, May 13, 1998, p. D1. 44 Bob Herbert, “Nike Blinks,” The New York Times, May 21, 1998, p. A33. 45 Casewriter interview. 13 700-047 Exhibit 1 -14- Nike Inc. Financial History, 1989 – 1999 (in millions of dollars) Year Ended May 31 Revenues Gross margin Gross margin % Restructuring charge, net Net income Cash flow from operations Price range of common stock High Low Cash and equivalents Inventories Working capital Total assets Long-term debt Shareholders’ equity Year-end stock price Market capitalization Geographic Revenues: United States Europe Asia/Pacific Americas (exclusive of U.S.) Total revenues 1999 $8,776.9 3,283.4 37.4 45.1 451.4 961.0 1998 $9,553.1 3,487.6 36.5 129.9 399.6 517.5 1997 $9,186.5 3,683.5 40.1 -795.8 323.1 1996 $6,470.6 2,563.9 39.6 -553.2 339.7 1995 $4,760.8 1,895.6 39.8 -399.7 254.9 1994 $3,789.7 1,488.2 39.3 -298.8 576.5 1993 $3,931.0 1,544.0 39.3 -365.0 265.3 65.500 31.750 $ 198.1 1,199.3 1,818.0 5,247.7 386.1 3,334.6 60.938 17,202.2 64.125 37.750 $ 108.6 1,396.6 1,828.8 5,397.4 379.4 3,261.6 46.000 13,201.1 76.375 47.875 $ 445.4 1,338.6 1,964.0 5,361.2 296.0 3,155.9 57.500 16,633.0 52.063 19.531 $ 262.1 931.2 1,259.9 3,951.6 9.6 2,431.4 50.188 14,416.8 20.156 14.063 $ 216.1 629.7 938.4 3,142.7 10.6 1,964.7 19.719 5,635.2 18.688 10.781 $ 518.8 470.0 1,208.4 2,373.8 12.4 1,740.9 14.750 4,318.8 22.563 13.750 $ 291.3 593.0 1,165.2 2,186.3 15.0 1,642.8 18.125 5,499.3 $5,042.6 2,255.8 844.5 634.0 $8,776.9 $5,460.0 2,096.1 1,253.9 743.1 $9,553.1 $5,538.2 1,789.8 1,241.9 616.6 $9,186.5 $3,964.7 1,334.3 735.1 436.5 $6,470.6 $2,997.9 980.4 515.6 266.9 $4,760.8 $2,432.7 927.3 283.4 146.3 $3,789.7 $2,528.8 1,085.7 178.2 138.3 $3,931.0 1992 $3,405.2 1,316.1 38.7 -329.2 435.8 19.344 8.781 $260.1 471.2 964.3 1,871.7 69.5 1,328.5 14.500 4,379.6 $2,270.9 919.8 75.7 138.8 $3,405.2 1991 $3,003.6 1,153.1 38.4 -287.0 11.1 13.625 6.500 $119.8 586.6 662.6 1,707.2 30.0 1,029.6 9.938 2,993.0 $2,141.5 664.7 56.2 141.2 $3,003.6 1990 $2,235.2 851.1 38.1 -243.0 127.1 10.375 4.750 $ 90.4 309.5 561.6 1,093.4 25.9 781.0 9.813 2,942.7 $1,755.5 334.3 29.3 116.1 $2,235.2 1989 $1,710.8 636.0 37.2 -167.0 169.4 4.969 2.891 $85.7 222.9 419.6 824.2 34.1 558.6 4.750 1,417.4 $1,362.2 241.4 32.0 75.2 $1,710.8 All per common share data has been adjusted to reflect the 2-for-1 stock splits paid October 23, 1996, October 30, 1995 and October 5, 1990. The Company’s Class B Common Stock is listed on the New York and Pacific Exchanges and traded under the symbol NKE. At May 31, 1999, there were approximately 170,000 shareholders. Source: Nike, Inc., Annual Report 1999 Hitting the Wall: Nike and International Labor Practices Exhibit 2 700-047 Estimated Cost Breakdown of an Average Nike Shoe, 1999 $3.37 $3.41 $14.60 $1.12 $22.50 $45 $90 Labor costs Manufacturer’s overhead Materials Profit to factory Factory price to Nike Wholesale price Retail price Source: Jennifer Lin, “Vietnam Gives Nike a Run for Its Money,” The Philadelphia Enquirer, March 23, 1998, p. 1. Exhibit 3 Prices of Some Popular Running Shoe Styles in New York City, 1996 Nike Air Max Foot Locker Paragon Sports Sports Authority Super Runners Shop Men’s $140 140 140 140 Women’s $135 135 140 130 New Balance 999 Men’s $124 135 101 125 Women’s $105 109 101 110 Saucony Grid Shadow Men’s $85 70 78 85 Women’s $85 70 78 85 Source: “Feet Don’t Fail...,” The New York Times, November 3, 1996, Section 13, p. 12. 15 700-047 Exhibit 4 Hitting the Wall: Nike and International Labor Practices Summary Revenue and Expense Profile of Minimum Wage Workers by Demographic Type (in Indonesian Rupiah) Number of respondents Base wages Total wages Rent Food Transportation Savings Contribution to home Total uses SH 67 172,812 225,378 SO 161 172,071 238,656 14,677 84,774 48,984 38,369 22,175 40,955 95,744 24,189 41,783 37,594 208,980 240,266 Dorm 33 172,197 239,071 12,121a 90,455 7,219 70,303 57,644 237,741 MH 21 173,905 248,794 MO 32 172,650 244,458 Total (weighted) 314 172,424 236,893 24,775 103,421 17,471 29,412 25,222 56,050 128,793 38,200 49,185 25,089 32,838 103,020 28,560 44,154 34,441 200,301 297,318 243,013 a17 of the 33 respondents were provided free housing by the factory. The remaining 16 paid a subsidized monthly rent of Rp 25,000. Note: Monthly Wages and Total Uses of wages may not match due to averaging. Key to demographic type: SH - Single workers living at home SO - Single workers living away from home and paying rent Dorm - Single workers living away from home and living in factory subsidized housing MH - Married workers living at home MO - Married workers living away from home Source: Derek Calzini, Shawna Huffman, Jake Odden, Steve Tran, and Jean Tsai, Nike, Inc: Survey of Vietnamese and Indonesian Domestic Expenditure Levels, November 3, 1997, Field Study in International Business (Dartmouth, NH: The Amos Tuck School, 1997), pp. 9-10. 16 Hitting the Wall: Nike and International Labor Practices Exhibit 5 700-047 Typical "Basket" of Basic Food Expenditures for Indonesian workers (in rupiah) Rice Instant Noodles Eggs Tofu Tempe Kancang Pangung Peanuts Oil Other “luxury” foods Fish Chicken 800-1,300 300-500 2,800-3,000 1,500 1,500 1,500 2,600 2,300 per 5 servings per serving per 18 eggs per 15 servings per 15 servings per 15 servings per kilogram per liter 6,000 4,500-5,000 per kilogram per chicken Source: Derek Calzini, Shawna Huffman, Jake Odden, Steve Tran, and Jean Tsai, Nike, Inc: Survey of Vietnamese and Indonesian Domestic Expenditure Levels, November 3, 1997, Field Study in International Business (Dartmouth, NH: The Amos Tuck School, 1997), p. 45. 17 700-047 Hitting the Wall: Nike and International Labor Practices Strikes and Lockouts in Indonesia, 1988 - 1997 Exhibit 6 350 300 Total per Year 250 200 150 100 50 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 Source: International Labour Office, Yearbook of Labor Statistics 1998 (Geneva; ILO, 1999), p.1213. 18 1997 Hitting the Wall: Nike and International Labor Practices Exhibit 7 700-047 Wages and Productivity in Industrialized and Developing Nations (figures in $ per year) Average Hours Worked Per Week 1980-84 1980-84 1990-94 34 33 34 6,006 4,974 1,002 8,056 b 7,897 843 -39 41 -c 41 40 37 39 40 41 c 41 39 9,170 10,815 19,933 b 22,955 --9,074 5,246 -b 15,170 -48 48 -47 52 ---48 -46 48 -46 48 -43 46 -- ----3,920 ------ --408 241 b 8,327 b 3,903 North America United States Canada Mexico 35 32 -- Europe Denmark France Germany Greece Ireland Netherlands Asia China (PRC) Hong Kong India Indonesia Japan South Korea Malaysia Philippines Singapore Thailand 1990-94 Labor Cost Per Worker in Manufacturing Yearly Minimum Wage a b b a a 1,067 -1,083 1980-84 Value Added Per Worker in Manufacturing 1990-94 1980-84 1990-94 19,103 17,710 3,772 32,013 b 28,346 6,138 b 47,276 36,903 17,448 81,353 60,712 25,991 16,169 16,060 d 21,846 6,461 10,190 18,891 35,615 b 38,900 b,d 63,956 b 15,899 b 25,414 b 39,865 b 27,919 26,751 -14,561 26,510 27,491 49,273 e 61,019 -30,429 86,036 56,801 472 4,127 1,035 898 12,306 3,153 2,519 1,240 5,576 2,305 434 b 13,539 1,192 1,008 b 40,104 b 15,819 3,429 2,459 b 21,534 2,705 3,061 7,886 2,108 3,807 34,456 11,617 8,454 5,266 16,442 11,072 2,885 19,533 3,118 5,139 92,582 40,916 12,661 9,339 40,674 19,946 d A.) Country has sectoral minimum wage but no minimum wage policy. B.) Data refer to 1995 – 1999. C.) Data refer to hours worked per week in manufacturing. D) Data refer to wage per worker in manufacturing. E.) International Labor Organisation data. Source: World Bank, World Development Indicators 1999 (Washington, D.C.; World Bank, 1999), pp.6264. 19 700-047 Exhibit 8 Indonesia: Wages and Inflation, 1993-97 1993 Minimum Maximum Monthly wages in manufacturing industry (thousands of rupiah) 196 2,920 Minimum wage regional averagea (thousands of rupiah) 72 Annual percent change Consumer price inflation Exchange rates (average Rp:$) Source: -20- 1994 Minimum Maximum 207 3,112 1995 Minimum Maximum 238 3,453 1996 Minimum Maximum 241 3,453 1997 Minimum Maximum 439 6,050 94 112 118 130 17.7 30.8 19.5 5.4 10.2 8.5 9.4 8.0 6.7 57.6 2,161 2,249 2,342 2,909 10,014 International Monetary Fund, Economist Intelligence Unit. Figures are based on periodic surveys of primarily urban-based business establishments and include transportation, meal, and attendance allowances. aCalculated from minimum daily figure for 30 days per month. Increased by 9% to Rp122,000 in 1996 and by 10% to Rp135,000 in 1997. Hitting the Wall: Nike and International Labor Practices Exhibit 9 700-047 Life magazine photo of Pakistani child worker Source: Life Magazine, June 1996, p. 39. 21 700-047 Hitting the Wall: Nike and International Labor Practices Exhibit 10 Doonesbury Cartoons About Nike Copyright: Doonesbury © 1997 G. B. Trudeau. Reprinted with Permission of Universal Press Syndicate. All rights reserved. 22 700-047 Exhibit 11 Anti-Nike Activist Materials Source: Jeff Ballinger; http://www.nikeworkers.org [10/29/99]; http://www.corpwatch.org/nike/ [10/29/99]. -23- 9-700-047 REV: SEPTEMBER 6, 2002 DEBORA L. SPAR Hitting the Wall: Nike and International Labor Practices Moore: Twelve year olds working in [Indonesian] factories? That’s O.K. with you? Knight: They’re not 12-year-olds working in factories... the minimum age is 14. Moore: How about 14 then? Does that bother you? Knight: No. — Phil Knight, Nike CEO, talking to Director Michael Moore in a scene from documentary film The Big One, 1997. Nike is raising the minimum age of footwear factory workers to 18… Nike has zero tolerance for underage workers. 1 — Phil Knight, 1998 In 1997, Nguyen Thi Thu Phuong died while making sneakers. As she was trimming synthetic soles in a Nike contracting factory, a co-worker’s machine broke, spraying metal parts across the factory floor and into Phuong’s heart. The 23 year-old Vietnamese woman died instantly.2 Although it may have been the most dramatic, Phuong’s death was hardly the first misfortune to hit Nike’s far-flung manufacturing empire. Indeed, in the 1980s and 1990s, the corporation had been plagued by a series of labor incidents and public relations nightmares: underage workers in Indonesian plants, allegations of coerced overtime in China, dangerous working conditions in Vietnam. For a while, the stories had been largely confined to labor circles and activist publications. By the time of Phuong’s death, however, labor conditions at Nike had hit the mainstream. Stories of reported abuse at Nike plants had been carried in publications such as Time and Business Week and students from major universities such as Duke and Brown had organized boycotts of Nike products. Even Doonesbury had joined the fray, with a series of cartoons that linked the company to underage 1 “Nike CEO Phil Knight Announces New Labor Initiatives,” PR Newswire, May 12, 1998. 2 Tim Larimer, “Sneaker Gulag: Are Asian Workers Really Exploited?” Time International, May 11, 1998, p. 30. ________________________________________________________________________________________________________________ Research Associate Jennifer L. Burns prepared this case under the supervision of Professor Debora L. Spar. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2000 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 700-047 Hitting the Wall: Nike and International Labor Practices and exploited Asian workers. Before these attacks, Nike had been widely regarded as one of the world’s coolest and most successful companies. Now Nike, the company of Michael Jordan and Tiger Woods; Nike, the sign of the swoosh and athletic prowess, was increasingly becoming known as the company of labor abuse. And its initial response — “We don’t make shoes” — was becoming harder and harder to sustain.3 Nike, Inc. Based in Beaverton, Oregon, Nike had been a corporate success story for more than three decades. It was a sneaker company, but one armed with an inimitable attitude, phenomenal growth, and the apparent ability to dictate fashion trends to some of the world’s most influential consumers. In the 1970s, Nike had first begun to capture the attention of both trend-setting teenagers and financial observers. Selling a combination of basic footwear and street-smart athleticism, Nike pushed its revenues from a 1972 level of $60,000 to a startling $49 million in just ten years.4 It went public in 1980 and then astounded Wall Street in the mid-1990s as annual growth stayed resolutely in the double digits and revenues soared to over $9 billion. By 1998, Nike controlled over 40% of the $14.7 billion U.S. athletic footwear market. It was also a growing force in the $64 billion sports apparel market, selling a wide range of sport-inspired gear to consumers around the globe.5 What differentiated Nike from its competitors was not so much its shoes as its strategy. Like Reebok and adidas and New Balance, Nike sold a fairly wide range of athletic footwear to a fairly wide range of consumers: men and women, athletes and non-athletes, in markets around the world. Its strategy, though, was path breaking, the product of a relatively simple idea that CEO Phil Knight had first concocted in 1962 while still a student at Stanford Business School. The formula had two main prongs. First, the company would shave costs by outsourcing all manufacturing. There would be no in-house production, no dedicated manufacturing lines. Rather all product would be made by independent contracting factories, creating one of the world’s first “virtual” corporations — a manufacturing firm with no physical assets. Then, the money saved through outsourcing would be poured into marketing. In particular, Knight focussed from the start on celebrity endorsements, using high-profile athletes to establish an invincible brand identity around the Nike name. While other firms had used celebrity endorsements in the past, Nike took the practice to new heights, emblazoning the Nike logo across athletes such as Michael Jordan and Tiger Woods, and letting their very celebrity represent the Nike image. “To see name athletes wearing Nike shoes,” Knight insisted, “was more convincing than anything we could say about them.”6 With the help of the “swoosh,” a distinctive and instantly recognizable logo, Nike became by the 1990s one of the world’s best known brands, as well as a global symbol of athleticism and urban cool. But within this success story lay a central irony that would only become apparent in the late 1990s. While the marketing of Nike’s products was based on selling a high profile fashion item to affluent Americans who only wished they could “Just Do It” as well as Woods or Jordan, the manufacture of these sneakers was based on an arms-length and often uneasy relationship with low-paid, non- 3 The quote is from Martha Benson, Nike’s regional spokeswoman in Asia. See Larimer, p. 30. 4 David B. Yoffie, Nike: A (Condensed), HBS Case 391-238 (Boston: HBS Press, 1991), p. 1. 5 Both figures are for retail sales. Footwear 1999, (North Palm Beach; Athletic Footwear Association, 1999), introduction; Dana Eisman Cohen and Sabina McBride, Athletic Footwear Outlook 1999, (New York: Donaldson, Lufkin & Jenrette, 1998), p. 3. 6 Yoffie, p. 6. 2 Hitting the Wall: Nike and International Labor Practices 700-047 American workers. For according to Knight’s original plan, not only would Nike outsource, but it would outsource specifically to low cost parts of the world. Nike signed its first contracts with Japanese manufacturers but eventually shifted its supply base to firms in South Korea and Taiwan, where costs were lower and production reliable. In 1982, 86% of Nike sneakers came from one of these two countries and Nike had established a large network of suppliers in both nations. But as South Korea and Taiwan grew richer, costs rose and Nike began to urge its suppliers to move their operations to new, lower cost regions. Eager to remain in the company’s good graces, most manufacturers rapidly complied, moving their relatively inexpensive plants to China or Indonesia. By 1990, these countries had largely replaced South Korea and Taiwan as the core of Nike’s global network. Indonesia, in particular, had become a critical location, with six factories that supplied Nike and a booming, enthusiastic footwear industry.7 Taking Care of Business At first, Indonesia seemed an ideal location for Nike. Wages were low, the workforce was docile, and an authoritarian government was yearning for foreign direct investment. There were unions in the country and occasional hints of activism, but the Suharto government clearly was more interested in wooing investors than in acceding to any union demands. So wages stayed low and labor demands were minimal. In 1991, the daily minimum wage in Indonesia’s capital city was barely $1, compared to a typical daily wage of $24.40 in South Korea8 and a U.S. hourly wage in athletic shoe manufacturing of about $8.9 For firms like Nike, this differential was key: according to a reporter for the Far Eastern Economic Review, shoes coming out of China and Indonesia cost roughly 50% less than those sourced from Taiwan and South Korea.10 Just as Nike was settling into its Indonesian operations, though, a rare wave of labor unrest swept across the country. Strikes, which had been virtually nonexistent in the 1980s, began to occur with increasing frequency; according to government figures, there were 112 strikes in 1991,11 a sharp increase from the 19 reported in 1989.12 A series of polemical articles about foreign companies’ labor abuses also appeared in Indonesian newspapers, triggering unprecedented demands from factory workers and empowering a small but potent band of labor organizers. The source of these strikes and articles was mysterious. Some claimed that the Indonesian government was itself behind the movement, trying to convince an increasingly suspicious international community of the country’s commitment to freedom of speech and labor rights. Others saw the hand of outside organizers, who had come to Indonesia solely to unionize its work force and embarrass its foreign investors. And still others saw the outbursts as random eruptions, cracks in the authoritarian veneer which quickly took on a life of their own. In any case, though, the unrest occurred just around the time of Nike’s expansion into Indonesia. In 1991 the Asian-American Free 7 Philip M. Rosenzweig and Pam Woo, International Sourcing in Footwear: Nike and Reebok, HBS Case 394-189 (Boston: HBS Press, 1994), pp. 2 - 5. 8 Elliot B. Smith, “K-Swiss in Korea,” California Business, October 1991, p. 77. 9 Rosenzweig and Woo, p. 3. 10 Mark Clifford, “Pain in Pusan,” Far Eastern Economic Review, November 5, 1992, p. 59. 11 Suhaini Aznam, “The Toll of Low Wages,” Far Eastern Economic Review, April 2, 1992, p. 50. 12 Margot Cohen, “Union of Problems: Government Faces Growing Criticism on Labour Relations,” Far Eastern Economic Review, August 26, 1993, p. 23. 3 700-047 Hitting the Wall: Nike and International Labor Practices Labor Association (AAFLI, a branch of the AFL-CIO) published a highly critical report on foreign companies in Indonesia. Later that year, a group of Indonesian labor economists at the Institut Teknology Bandung (ITB), issued a similar report, documenting abusive practices in Indonesian factories and tracing them to foreign owners. In the midst of this stream of criticism was a labor organizer with a deep-seated dislike for Nike and a determination to shape its global practices. His name was Jeff Ballinger. The Role of Jeff Ballinger A labor activist since high school, Ballinger felt passionately that any company had a significant obligation towards even its lowliest workers. He was particularly concerned about the stubborn gap between wage rates in developed and developing worlds, and about the opportunities this gap created for rich Western companies to exploit low-wage, politically repressed labor pools. In 1988, Ballinger was assigned to run the AAFLI office in Indonesia, and was charged with investigating labor conditions in Indonesian plants and studying minimum wage compliance by overseas American companies. In the course of his research Ballinger interviewed workers at hundreds of factories and documented widespread worker dissatisfaction with labor conditions. Before long, Nike emerged as a key target. Ballinger believed that Nike’s policy of competing on the basis of cost fostered and even encouraged contractors to mistreat their workers in pursuit of unrealistic production quotas. Although Indonesia had worker protection legislation in place, widespread corruption made the laws essentially useless. While the government employed 700 labor inspectors, Ballinger found that out of 17,000 violations reported in 1988, only 12 prosecutions were ever made. Bribery took care of the rest.13 Nike contractors, in particular, he believed, were regularly flouting Indonesian labor laws and paying below-subsistence wages that did not enable workers to meet their daily requirements for food and other necessities. And to top matters off, he found Nike’s attitude in the face of these labor practices galling: “It was right around the time that the swoosh started appearing on everything and everyone,” Ballinger remembered. “Maybe it was the swagger that did it.”14 What also “did it,” though, was Ballinger’s own strategic calculation — a carefully crafted policy of “one country-one company.” Ballinger knew that his work would be effective only if it was carefully focused. And if his goal was to draw worldwide attention to the exploitation of third-world factory workers by rich U.S. companies, then Nike made a nearly ideal target. The arithmetic was simple. The same marketing and branding power that drove Nike’s bottom line could also be used to drive moral outrage against the exploitation of Asian workers. After the publication of his AAFLI report, Ballinger set out to transform Nike’s competitive strength into a strategic vulnerability. For several years he worked at the fringes of the activist world, operating out of his in-laws’ basement and publishing his own newsletter on Nike’s practices. For the most part, no one really noticed. But then, in the early 1990s Ballinger’s arguments coincided with the strikes that swept across Indonesia and the newfound interest of media groups. Suddenly his stories were big news and both the Indonesian government and U.S. firms had begun to pay attention. 13 Interview with casewriter, Cambridge, MA, July 6, 1999. 14 Ibid. 4 Hitting the Wall: Nike and International Labor Practices 700-047 Early Changes The first party to respond to criticism from Ballinger and other activists was the government itself. In January 1992 Indonesia raised the official minimum daily wage from 2100 rupiah to 2500 rupiah (US$1.24). According to outside observers, the new wage still was not nearly enough: it only provided 70% of a worker’s required minimal physical need (as determined by the Indonesian government) and was further diluted by the way in which many factories distributed wages and benefits.15 The increased wage also had no impact on “training wages,” which were lower than the minimum wage and often paid long after the training period had expired. Many factories, moreover, either ignored the new wage regulations or successfully petitioned the government for exemption. Still, the government’s actions at least demonstrated some willingness to respond. The critics took note of this movement and continued their strikes and media attacks. Despite the criticism, Nike insisted that labor conditions in its contractors’ factories were not — could not — be Nike’s concern or its responsibility. And even if labor violations did exist in Nike’s contracting factories, stated the company’s general manager in Jakarta, “I don’t know that I need to know.”16 Nike’s company line on the issue was clear and stubborn: without an inhouse manufacturing facility, the company simply could not be held responsible for the actions of independent contractors. Realizing the severity of the labor issue, though, Nike did ask Dusty Kidd, a newly-hired member of its public relations department, to draft a series of regulations for its contractors. In 1992, these regulations were composed into a Code of Conduct and Memorandum of Understanding and attached to the new contracts sent to Nike contractors. In the Memorandum, Nike addressed seven different aspects of working conditions, including safety standards, environmental regulation and worker insurance. It required its suppliers to certify they were following all applicable rules and regulations and outlined general principles of honesty, respect, and non-discrimination. Meanwhile, other shoe companies had been facing similar problems. Reebok, a chief competitor of Nike, also sourced heavily from Indonesia and South Korea. Like Nike, it too had been the subject of activist pressure and unflattering media. But unlike Nike, Reebok had moved aggressively into the human rights arena. In 1988, it created the Reebok Human Rights Award, bestowed each year on youthful contributors to the cause of human rights, and in 1990 it adopted a formal human rights policy.17 When activists accused the company of violating workers’ rights in Indonesia, Reebok responded with a far-reaching set of guidelines, one that spoke the explicit language of human rights, set forth specific standards for the company’s contractors and promised to audit these contractors to ensure their compliance.18 It was a big step for an American manufacturer and considerably farther than Nike had been willing to go. Into the Spotlight By 1992, criticism of Nike’s labor practices had begun to seep outside of Indonesia. In the August issue of Harper’s magazine, Ballinger published an annotated pay-stub from an Indonesian factory, 15A factory, for example, could pay a base wage lower than 2500 rupiah, but bring total compensation up to legal levels by the addition of a food allowance and incentive payments (see Aznam, p. 50). 16 Adam Schwarz, “Running a Business,” Far Eastern Economic Review, June 20, 1991, p. 16. 17 Rosenzweig and Woo, p. 7. 18 Ibid., pp. 16-17. 5 700-047 Hitting the Wall: Nike and International Labor Practices making the soon-to-be famous comparison between workers’ wages and Michael Jordan’s endorsement contract. He noted that at the wage rates shown on the pay stub, it would take an Indonesian worker 44, 492 years to make the equivalent of Jordan’s endorsement contract.19 Then the Portland Oregonian, Nike’s hometown newspaper, ran a series of critical articles during the course of the 1992 Barcelona Olympics. Also at the Olympics, a small band of protestors materialized and handed out leaflets that charged Nike with exploitation of factory workers. The first mainstream coverage of the issue came in July 1993, when CBS interviewed Indonesian workers who revealed that they were paid just 19¢ an hour. Women workers could only leave the company barracks on Sunday, and needed a special letter of permission from management to do so. Nike responded somewhat more forcefully to this next round of allegations, hiring accounting firm Ernst & Young to conduct formal audits of its overseas factories. However, because Ernst & Young was paid by Nike to perform these audits, activists questioned their objectivity from the start. Public criticism of Nike’s labor practices continued to mount. Then suddenly, in 1996, the issue of foreign labor abuse acquired a name and a face: it was Kathie Lee Gifford, a popular daytime talk show host. In April human rights activists revealed that a line of clothing endorsed by Gifford had been manufactured by child labor in Honduras. Rather than denying the connection Gifford instantly rallied to the cause. When she appeared on television, crying and apologetic, a wave of media coverage erupted. Or as Ballinger recalls, “That’s when my phone really started ringing.”20 Although Nike was not directly involved in the Gifford scandal, it quickly emerged as a symbol of worker exploitation and a high-profile media scapegoat. Child labor was the first area of concern. In July, Life magazine ran a story about child labor in Pakistan, and published a photo of a 12 year old boy stitching a Nike soccer ball.21 Then Gifford herself publicly called upon fellow celebrities such as Michael Jordan to investigate the conditions under which their endorsed products were made and to take action if need be. Jordan brushed away suggestions that he was personally responsi...
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Running head: PLANNING AND IMPLEMENTATION

Planning and Implementation
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PLANNING AND IMPLEMENTATION

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Some of Nike Inc. business segments include corporate and converse, China, the US,
Europe, and Japan among others. The company deals with the development, marketing, design,
and sale of athletic apparel, equipment, accessories, footwear and other services. From the
market segments it operates in, it is clear that Nike Inc. is a multinational company. This means
that the company has its operations in more than one country. Such a company’s management
practices, HR policies, and strategy decisions significantly differ with other local companies. To
begin with, the management practices and human resource policies at a multinational company
has to put into consideration the different cultures and the general business environment in the
individual countries the company operates. This is opposed to a local company that only has one
business environment to strategize on. Factors such as the labor laws in each country, the
different organizational cultures, ethnicities and o...


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