A MULTINATIONAL CORPORATION: NIKE
A multinational corporation (MNC) is a corporation that ventures and manages production establishments in at least two countries from anywhere in the world. MNC is subdivided into three groups, the horizontally integrated MNC, the vertically integrated MNC and the diversified MNC group.
In this paper, we would explore one American MNC, specifically the Nike, Incorporated, and look into as to how the firm prices its revenues and cost in terms of currency denomination. Further, we would assess how the dollar exchange rate has an effect on the firm’s profitability.
Nike Inc. coined from the Greek’s goddess of beauty, in retrospect, started out in 1964 as Blue Ribbon Sports in Oregon with two business partners and co-founders namely, . All over the world Nike has been known in their swoosh trademark and as the leading manufacturer of innovative athletic shoes, apparels and sports equipments. Further, Nike has four subsidiaries that include, , Converse and Hurley International. Currently, Nike has 137 factories in the Americas, 104 in the EMEA and 490 factories in Asia.
The inevitable alteration and somewhat unpredictable currency exchange rates have an impact on the revenue growth such that it may reduce the growth instead of gaining full growth. It is important for MNC’s to be wise enough to come with means to constantly cost-optimized the cost to generate higher revenues and strategically plan for a long-term basis.
From the financial reports of March of 2006 (figure 1), Nike posted a 3rd quarter revenues increasing nine percent compared from 3rd quarter from last year but with a 3 percent reduction in the revenues brought about by the changes in currency exchange rates. Moreover, Nike reported future orders that amounted to $5.4 billion, 2.9 percent higher from last year, even with the fact that the currency exchange rate has reduced this growth.
Figure 1: Financial Statements of Nike, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED FEBRUARY 28, 2006
(In millions, except per share data)
QUARTER - ENDING YEAR TO DATE ENDING
INCOME STATEMENT 02/28/2006 02/28/2005 %Chg 02/28/2006 02/28/2005 %Chg
Revenues $3,612.8 $3,308.2 9% $10,949.5 $10,018.3 9%
Cost of sales 2,038.7 1,849.4 10% 6,115.9 5,585.6 9%
Gross margin 1,574.1 1,458.8 8% 4,833.6 4,432.7 9%
43.6% 44.1% 44.1% 44.2%
The effect of value of the dollar in the currency exchange rate as it increases would generate profitability for Nike such that the cost of sales is kept at minimum due to the fact that Nike’s factories operates mostly from Asia which is known to have low labor cost. When it will be marketed to the disparate parts of the world, the high value of dollar would contribute as the market would buy it at a high price. Whereas, if the value of dollar is low, eventhough the cost of sales is kept at minimum, the generation of profit is relatively low also. Therefore, the currency exchange rate is indicative of the maximization of profit.
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