Application of Agency Theory: A Case Study of Nike and Converse

This report delves into the agency relationship between Nike Inc. and Converse Inc., focusing on a specific issue where Converse, acting as the agent, allowed Nike to re-sell their Chuck Taylor series with revamped prices, leading to customer dissatisfaction due to significant price hikes. The report examines the initial problem in the Turkish market and expands the analysis to the US market, highlighting similar negative impacts of the increased prices on customer perception and sales. It discusses potential resolutions, primarily focusing on price adjustments to align with customer expectations. The report also emphasizes that shifting the product placement to other countries would not solve the core issue, as the price point remains a critical factor influencing consumer behavior, referencing how the launch of the Chuck Modern series was an attempt to rectify the initial misstep. The report concludes that understanding and addressing customer price sensitivity is crucial for the success of agency relationships in the retail industry.

Running head: AGENCY THEORY
Topic 2: Agency Theory
Name of the Student
Name of the University
Author Note

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Agency Relationship Issue between Nike Inc. and Converse
The agency relationship is a phenomenon when a company agrees to provide the legal
authority to another company to use their brand name in selling their products. In this
relationship, the former organization is termed as the principal and the latter is termed an agent.
Similarly, the principal company in this regard is the organization of Nike Inc., and the agent
here is the organization of Converse Inc. Both the organizations belong to the same retail
industry that deals with manufacturing and selling shoes.
The converse is an organization that started with the manufacturing and selling of rubber
shoes initially from Malden, Massachusetts in the United States of America. Then with time,
they began selling shoes of different kinds and now have mastered the retail industry with their
sneaker products, such that the sneaker range with their unique design is regarded as ‘converse'
shoes all over the world (Mitnick, 2015). It is one of the famous shoe brands and primarily
targets the younger generation with their comparatively low price. Converse had an ongoing
product of Converse Chuck Taylor All Stars shoes that they made famous within a price range of
281 Turkish liras. This was one of the most affordable ranges of the converses, however; the
organization decided to make their product sell through the brand Nike Inc. and establish a
business relationship.
Converse Inc. used to sell the Chuck Taylor range by itself. However, they agreed to
allow Nike Inc. to resale the product with revamped prices. This made Converse the agent and
Nike the principal, thus forming an agency relationship. The situation was such that the
organization of Nike Inc. reintroduced the Chuck series in the market with the refurbished
product name Chuck 2 series and relaunched it with a new price. The problem started with the
organization of Converse since the previous Chucks consignment was lower in, but the principal

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and agent collaboration hiked the price at an expensive level. From 281 Turkish liras, the costs of
the Chuck II series went to a costly level of 422 Turkish liras which created a big problem for the
customers to buy.
The company denies that the decline was linked to the launch of the Chuck II, citing
spending on buying back different licenses and supply chain investments, by the end of the fiscal
year, Nike had overhauled the executive team. Nike Inc. and Converse Inc. have established an
agency relationship within themselves and thus the critics heavily panned the Chuck II series for
obvious reasons. The problem was chiefly due to the high prices. The inexpensive prices made
Chuck I one of the most popular shoe series with the customers due to its reasonable price range,
but the problem resided only in the cost of the new product launched out of the stable Agency
relationship between the two organizations.
Resolving the agency problem
Much obviously, this problem needed to be solved at the earliest, because the issue that was
raised due to the formation of an Agency Relationship The agency problem could only be
resolved if the agency and principal both agreed on the reduction of the price as per the liking of
the customers. The problem could only be solved if both the companies came into a mutual
termination of lowering the rate to a permissible range so that the customers would find it
feasible to buy.
In other terms, it can also be considered that Nike Inc. had seen the popularity of the product
within the customers. They took it for granted that even if the price rose to an expensive level,
the customers would still buy it, given the demand for the product. They blamed it on the
improved product used in the new product of Chuck II. However, it was not the case, and the
product was immediately shunned by the critics and the customers equally focusing mostly on

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the hike in price. In addition to all the problems, the Turkish market should also not be neglected.
The Turkish market has regarded the Converse Chuck II product as a daring attempt since they
somehow had foreseen that the outcome would not do well in the national market given the
heightened price of the sneakers. Therefore, the only resolution to the problem would be the
lowering of the expenses to a permissible level so that both the organization could fare well and
the customers would also find the products feasible to buy.
Foreseeing the problem shifting to any other country
If the entire product placement is changed to the other parts of the world, the problem
would still be the same since the other part of the world would not accept the brands over the
costing of the product. For example, given the market of USA, it has been noticed that the
Agency relationship had still become a huge problem. In the market for the United States of
America, the price hike was even hard-hitting than the Turkish markets. Previously, Converse
Inc. used to sell the Chuck series for 50 USD (Shogren et al., 2015). However, after the company
decided to form an Agency relationship with Nike Inc., the Chuck II series was launched with a
considerable price hike of almost 25 USD and the new product had a price of 75 USD.
Quite naturally, the product found incompetence to the market and the customer likings,
shunned by both equally. In addition to this, the new insole also failed to provide sufficient
added value, and the design changes upset some Converse purists. As a result, the Agency
Relationship was forced to instigate into forming a new and improved range of Chuck products
called the Chuck Modern, designed especially for the urban teenagers who wake up early, are
gone all day long and need comfort, lightweight utility and versatility, with a new and much-
improved price range. Therefore, the foreseeing of the problem had already been proven right
given the scenario of the market in the United States of America.

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Reference
Mitnick, B. M. (2015). Agency theory. Wiley encyclopedia of management, 1-6.
Shogren, K. A., Wehmeyer, M. L., Palmer, S. B., Forber-Pratt, A. J., Little, T. J., & Lopez, S.
(2015). Causal agency theory: Reconceptualizing a functional model of self-
determination. Education and Training in Autism and Developmental Disabilities, 251-
263.