When consumers buy a pair of athletic shoes bearing the Nike logo, they are paying for a product associated in their minds with design, performance, and brand identity. But the factory that produced the shoes may not be owned by the company whose name appears on them.

Nike, the American sports footwear and apparel company, relies on contract manufacturers to produce most of its products. This model reflects an important shift in the business world: owning a factory is no longer a prerequisite for owning a product or building a global brand.

But why would a large company choose to outsource manufacturing rather than do it itself?

What Does the Company Keep In-House?

One concept covered in the International Business course taught by Dr. @Stephen Rosenbaum at Al Yamamah University is the make-or-buy decision: whether to carry out a particular activity within the company or outsource it to an external supplier.

Nike’s experience helps explain this decision. Rather than owning a vast network of factories, the company relies on contract manufacturing—that is, agreements with independent companies to make its products according to its requirements and specifications.

This model allows the company to focus its resources on other activities, such as product development, design, marketing, and brand management, while benefiting from the expertise and production capabilities of specialized manufacturers.

This is where the concept of global value chains comes in: a network of activities distributed across different companies and countries, from product design and sourcing materials to manufacturing, distribution, and sales to consumers.

A shoe’s economic value is not created solely in the factory; design, development, marketing, and distribution also help determine its final value.

Is Outsourcing to External Factories Always Less Expensive?

Contract manufacturing can help companies avoid huge investments in building and operating factories, while allowing them to benefit from suppliers with production expertise and the capacity to manufacture large quantities.

But this model does not eliminate costs; it changes their nature. Companies need to select suppliers, monitor quality, manage contractual relationships, and ensure that factories can meet demand on schedule.

The relationship becomes especially sensitive when it involves working conditions, compliance with environmental standards, and workers’ rights. Although a factory may be owned by an independent company, any violations related to the production of goods can affect the reputation of the brand that sells them.

That is why outsourcing—assigning some of a company’s activities to specialized providers—is not simply a way to reduce costs. It is a decision that requires balancing efficiency, control, and risk.

This trade-off is particularly important for Saudi companies seeking to expand into international markets. Some may be better off keeping design and product development in the Kingdom while outsourcing specific production activities to specialized factories abroad. In other cases, owning a factory may be essential to protect technical know-how or ensure quality.

The question a company should ask is not whether it can manufacture everything itself, but which activities it needs to own to maintain its competitive advantage—and which it can outsource without losing control of its products.

Academic reference:

https://www.pearson.com/en-gb/subject-catalog/p/international-business-the-new-realities-global-edition/P200000011563/9781292462547