Nike's Unprecedented Success: Assessing the Impact of Management Accounting - Essay Sample

Introduction

The positive impact of management accounting on enhancing the financial performance of Nike Corporation is unprecedented. Management accounting provides crucial cost data to managers to enable them to provide excellent quality and services at a competitive price to consumers. Nike relies on cost information produced by the management accounting to price different sports shoes and other products to different customer market segments. The objective of this study is to assess the effectiveness f the management accounting in facilitating the outstanding financial performance of Nike Corporation.

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Application & Analysis of Management Accounting on Nike's Financial Performance

One of the crucial roles of management accounting is pricing its different sporting shoes to survive the highly competitive industry. The sports equipment and accessories industry is highly competitive across the globe. As such, pricing and quality of products in the industry is a determining factor for success in the sector. The pricing consideration and strategy is what makes Nike the leading brand of sporting footwear across the brand. Unlike its rivals, who charge cheaply to attract and penetrate the market, Nike pricing strategy is the opposite. Value-based pricing is the approach used by Nike to price its high-end footwear in the market. Nike strategy is to offer the most beautiful, durable, innovative, and high-quality products at an affordable price.

Nike's management evaluates different pricing strategies that would help the company to maximize profits from different market segments across the globe. The conclusion was to introduce premium footwear that would help skim profits from various markets to optimize profitability. In the end, Nike's management has, in its portfolio of sports footwear, high-end products, such as Jordan, Air Max, Air Pippen, and Shox R4, among others. Nike applies value-based pricing, which is a branch of management accounting, to set prices on this top-notch footwear. The impact of high-quality footwear on the financial performance of Nike is substantial. In this vein, Nike revenue from footwear grew in 2019 by about 8.80%. The demand for Nike's premium continued to rise with time both in the US and internationally. The management of Nike did not consider constructing new plants in a different part of the world. Instead, it contracted manufacturers to manufacture on its behalf to reduce costs, such as fixed expenses. The three strategic contractors are in Indonesia, China, and Vietnam. In 2019, the three manufacturers accounted for 21%, 23%, and 49% of the total Nike footwear production volume in, respectively (Annual Income, 2019). In the last three years, Nike's revenue improved by $21081 million in 2017, which is a 6% increment compared with 2016 (Annual Report, 2019). In 2018, the company recorded a further improvement in the total revenue from footwear section by 9% to $22268 million. The premium class of footwear in Nike continued to show its positive influence on revenue when the total revenue expanded in 2019 by 9% to $25222 million (Annual Report, 2019).

Nike continues to use the newest technologies in the industry to manufacture high-quality footwear, which is costly compared with its competitors. Jordan air is one of the quality footwear brand owned by Nike. Introduction of the brand targeted wealthy people willing to own the product. The status of the sneaker led to Nike signing a contract with Michael Jordan as the official ambassador of the brand. Jordan air sneaker is a relatively expensive brand compared many of the footwear in the market. Jordan managed to earn Nike revenue of about $100million in 1986 immediately after its launching. Jordan still remains one of the successful footwear brands in the premium category that is improving Nike's profitability year after year. Jordan continued to perform extemporary in the market, and the management decided to market it as a separate brand. By the end of 2019, Mark Parker, the CEO of Nike reported that Jordan total revenue since it's launching was $1 billion. The average price of men Jordan is expensive compared with the other men's wear produced by Nike. Compared with the other footwear brands, the price of Jordan air averages $139 to $76 for other men's footwear brands. As the pioneer of the premium footwear produced by Nike, Jordan air continues to report increased revenue for the company with increased revenue by 10% in 2019 from 2018. Air max 270 and Vapormax are two value-based brands from Nike that are impacting its revenue significantly. In the first quarter of 2019, Nike reported a total profit of $1.1B, which is a 15% increment from the previous quarter. The CEO of Nike reported that a significant portion of the earnings comes from Air max 270 and Vapormax. The premium brands from Nike are impacting its financial performance over the years.

Discussion of Results

The application of the management accounting concept is critical in the pricing strategy and introduction of new products segments in the market. Value-based pricing means pricing products or services, depending on the value and attributes delivered to consumers (Hinterhuber, 2008). The ABC-costing is also paramount in allocating cost to products objectively. ABC-costing tracts and assign costs to products or services based on activities causing those costs (Elhamma & Zhang, 2013). Malinic, Jovanovic & Jankovic (2012) suggests that the essence of management accounting is to analyze the external environment and internal operations of the firm to generate crucial information for making informed decisions. The critical role of the management accounting is to provide the management with the appropriate cost information for strategic decision making. Management accounting helps Nike to create a customer market for it's high priced products to increase earnings.

Nike uses management accounting to analyse the market and produce products that are unique and affordable to a particular market segment. Using the value based pricing and ABC-costing, Nike manufacturer's high-end products that match their high prices. The demand level of the premium products is accelerating across the globe. The company is enlarging its production facilities to meet the rising demand, the use of the contractors to manufacture on its behalf is a function of management accounting aimed at minimizing the costs of doing business. In case Nike decides to build capacities to manufacture the products, it will incur more costs that when it is outsourcing. Outsourcing aids eliminating costs, such as fixed expenditure, such as facility maintenance and depreciation, among others (Shirzadeh, Heydariyeh & Hemmati, 2014). Cost reduction is a strategic approach for improving the profitability of a firm (Buytendijk, Lal & Toomey, 2008). Therefore, management in use, profitability should improve.

The premium category of products at Nike requires the use of the latest technology to improve equality and to meet market expectations. One of the approaches advocated by the management accounting to improve the quality level of products is continuous improvement production processes. Continuous improvement production involves analyzing the existing manufacturing processes to the quality of the output (Jevgeni, Eduard & Roman, 2015). The approach is critical for Nike for enchancing some of the existing brands to a premium level.

Summary

Management accounting practices are vital for managers to evaluate firm operations. Management accounting equips the management with essential information to effectively plan for sustainable competitiveness (Matambele & van Poll, 2017). Management accounting is necessary for Nike to evaluate its operating environment and strategize on how to outperform its rivals. One of the contributions of the management accounting in the building competitive advantage of Nike is value-based pricing, ABC-costing, continuous improvement production. Management accounting provides detailed information on the three areas to the management to improve its position in the market.

Nike relies on value-based pricing to create unique products for different market segments. Introduced highly price footwear, such as Air Max and Jordan to increase income from athletes and people who associate quality footwear with identity. The classified category of shoe is critical to enhancing Nike's financial performance. The demand for the premium footwear from Nike is growing as well as the income. Nike's premium products are expensive, but their quality is worth it. Management accounting helps Nike to improve the relationship with consumers in this market segment by continued improvement and invention of new products frequently. With continued enhanced royalty from consumers, the market size of Nike is growing across the globe and revenue accelerating. As the industry domestically and internationally continues to become highly competitive, Nike is diversifying its premium products to attract new consumers, while retaining the current. Nike's premium products continue to be the primary driver of the revenue compared with the standard products. Management accounting continues to be the foundation of innovation and creativity at Nike. The use of advanced technology is vital in lowering the cost of operations and improving the quality of production.

References

Annual Report. (2019). NIKE, Inc. Available at: https://s1.q4cdn.com/806093406/files/doc_financials/2019/annual/nike-2019-form-10K.pdf

Askarany, D. (2015). Innovation of management accounting practices and techniques. In Encyclopedia of Information Science and Technology, Third Edition (pp. 10-19). igi global.

Buytendijk, F., Lal, V., & Toomey, J. (2008). The Need for Profitability and Cost Management. An Oracle Thought Leadership White Paper, 1-17

Elhamma, A., & Zhang, Y. I. (2013). The relationship between activity-based costing, business strategy and performance in Moroccan enterprises. Accounting and Management Information Systems, 12(1), 22

Hinterhuber, A. (2008). Customer valuebased pricing strategies: why companies resist. Journal of business strategy.

Jevgeni, S., Eduard, S., & Roman, Z. (2015). Framework for continuous improvement of production processes and product throughput. Procedia Engineering, 100, 511-519.

Malinic, S., Jovanovic, D., & Jankovic, S. (2012). Competitive management accounting: Response to the challenges of strategic business decision making. Economics and Organizations, 9(3), 297-309.

Matambele, K., & van der Poll, H. M. (2017). Management Accounting Tools for Sustainability Information Decision-making and Financial Performance. Alternation Journal, (20), 189-213

Pitcher, G. S. (2015). Management accounting in support of the strategic management process