Case 2-2 Nike Inc.

It's hard to say exactly when Nike Inc., one-time corporate brat, began to transform itself into a
pillar of the community. But it may have been during a meeting in 1998, at a time when the
company was under attack for allegedly exploiting overseas factory workers. Nike, in its usual
maverick style, had initially tried to slough off the issue. But now, as managers argued over
whether to raise the minimum age of workers in those factories from 14 to 18, Nike Chairman and
co-founder Philip H. Knight ended the debate with a surprising call: Just do it.
The issue became a galvanizing force for both him and Nike. One of Corporate America's true free
spirits, the brash Knight had long cultivated an aloof, even arrogant, style. When the outcry over
working conditions in Nike's overseas factories started in the late '90s, he glossed over the
complaints, claiming he had little control over suppliers. But as protests mounted on college
campuses, Knight seemed to snap to attention. Suddenly, he was scouring the negative press
coverage for errors; writing college presidents about the issue; and bringing in Maria S. Eitel from
Microsoft Corp as vice-president for corporate responsibility. "Phil made clear from the day I
started that this is a huge priority," says Eitel.
These days, Knight is plugged into Nike's operations like never before. He has little choice. The
backlash against Nike's labor practices isn't the only crisis the company faces. Two years ago,
jolted by shifting teen fashions and the Asian economic downturn, sales of its sneakers and sports
apparel hit a brick wall, and the hard times aren't over. On February 8, Nike told analysts that
earnings this year and next would fall short of estimates because important retail chains are closing
stores and strong dollar is resulting in unfavorable currency translations (Exhibit 1). Immediately,
the stock swooned 18%, to 37, lopping a stunning $2.4 billion off Nike's stock market valuation.
"Investors feel that the turnaround they've been waiting for is being pushed off again," says Dana
Eisman Cohen, an analyst with Donaldson, Lufkin & Jenrette. "People are losing patience”
With that kind of pressure, Knight, the ultracompetitive former college miler who co-founded Nike
28 years ago by selling running shoes out of his car trunk, is struggling to rebuild the company
from top to bottom. That's required a huge attitude adjustment at Nike's headquarters in Beaverton,
Ore. Knight quadrupled sales in the '90s with a buccaneer style that had Nike thumbing its nose at
the sports Establishment. This, for example, company that in 1994 paid $25,000 to help defend
skating outcast Tonya Harding. But two years ago, Knight. 61, woke up to discover that Nike was
so big that it had become the Establishment. And like a middle-aged rock-and-roller who finds
himself raising a family in the 'burbs, he has had to learn to accept the responsibility that are comes
with age. "There are some things you can do as a $100 million company that you can't get away
with as a $9 billion company," Knight explains to Business Week in his first major interview about
Nike's new strategy. "We're not as rebellious as we were five years ago. “
No wonder-many of the rebels are gone. Over the past two years, Knight and his No. 2, President
Thomas E. Clarke, have trimmed Nike's payroll by 1,600, or 8%. At the same time, several
executives identified with Nike's go-go years left, replaced by outsiders schooled at some of the
nation's biggest corporations. Nine of Nike's 41 vice- presidents have worked at the company for
fewer than two years, compared with just one of 27 four years ago. Three months ago, Nike hired
a chief financial officer from PepsiCo Inc. Other newly minted vice-presidents have come from
Disney, General Motors, and SBC Communications. Competitors say Nike needed to upgrade and
deepen its management ranks. "I'm sure Nike's looking for fresh perspective, and newcomers bring
a fresh perspective," says Paul Heffernan, vice-president for global marketing at Boston-based
New Balance Athletic Shoe Inc.
The new team is immersed in the effort to reinvent Nike. Newcomers are heading initiatives that
include a unit charged with reaching nontraditional markets, particularly extreme-sports
enthusiasts such as skate- boarders and snowboarders. Others are revamping Nike's manufacturing
and logistics systems. Even the swoosh is no a longer sacred. The logo is shrinking on some items
and may disappear entirely from others.
The biggest change around the Beaverton campus, though, is that for the first time in years, Nike
executives are taking hard look at costs. Years of breakneck growth encouraged free spending. In
the past, managers had plenty of big-picture goals but no hard budget numbers to rein them in.
"Cost controls were a far second to boosting sales," recalls former marketing executive Elizabeth
G. Dolan, who worked at Nike for a decade before leaving in 1997 to start her own consulting
firm. Now, managers have to hold expense increases to about 3% below revenue increases. Nike
also recently launched an effort to streamline manufacturing and logistics. "We grew really fast
from 1994 to 1997, but I don't think anybody would suggest we were efficient," says Knight. "We
couldn't be. We were just chasing the growth."
That chase was breathtaking while it lasted. In the mid-'90s, Nike blew away competitors such as
Reebok and Adidas, its sales exploding from $3.8 billion in 1994 to $9.2 billion in 1997. Investors
reaped a 320% increase in the stock price from Jan. 1, 1995, to a high of 75 in early 1997. But in
1998, the sprinter pulled up lame. Sales plummeted in Asia and stalled in the U.S. For the fiscal
year ended May 31, sales slipped 8%. Even after overseas markets recovered late last year, Nike's
domestic sales rose a paltry 2%. Now, the company has lowered sales projections for this year to
an increase of just 3% to 4% from last year's $8.8 billion.
Nike's new lean focus helped it eke out a 13% increase in net income last year. But hopes for a
31% gain in 2000 were dashed when Clarke told analysts that earnings would come in slightly
below estimates for this year and next. He said earnings-per-share growth would be held to "at
least 20%" in fiscal year 2000 and to the mid-teens in 2001. Jennifer Black, an analyst at Black &
Co. in Portland, Ore., believes Nike can generate a net carnings increase of 28% this year, still far
below the glory days un 1996 and 1997 when Nike racked up gains of 38% and 44%, respectively.
Nike's news was especially troubling because, like other mature consumer-products companies, it
was counting on overseas markets to speed growth. But with a weak euro, big gains in Europe are
unlikely. Meanwhile, Knight expects only single-digit sales gains in the U.S. for the next few
years. "Back in the mid-1990s, it was nirvana in the U.S. That's over," says Susan Zeeb, an analyst
at Northern Trust Corp., which manages about 1 million Nike shares for wealthy individuals.
The result is a more measured, but hardly humbled, Phil Knight. He still tools around Beaverton
in a black '92 Acura with NIKEMN (Nike Man) license plates and may be the only major American
CEO to have his corporate logo tattooed on his ankle. And he's just as visible back at headquarters,
where he still runs five miles a day. When top Nike-sponsored athletes drop by-golfer Tiger
Woods, for instance, whom the company will pay an estimated $60 million to $80 million over
five years -Knight is right by their side.
Knight may not have lost his ebullience, but his company is still in recovery from a downturn that
hit it like a body blow. Starting in 1997, thousands of fickle teens suddenly switched from Nike
Air Jordans to hiking boots and casual leather shoes. In 1994, athletic shoes accounted for 38% of
all shoes sold in the U.S.; four years later, that had slipped to 31%, according to industry researcher
Footwear Market Insights. Of course, that's still a healthy slice of the overall market, and Nike
dominates the category with a 40% share. Nike's own sales slide was accelerated by its lingering
association with arrogant millionaire athletes and overseas sweatshops.
Knight was blindsided by the ferocity of the anti-Nike sentiment about its overseas workers. The
damage to the brand was real-and not just on college campuses. "They exploit neople with what
they pay as minimum wage in Third World countries,” said Peter George, a runner from
Melbourne, Australia, just after he finished competing in last November’s New York City
Marathon. He was wearing Asics shoes.
Once Knight figured out that the critics weren't going away, he abruptly changed tactics. "As part
cf our evolution, we've chosen to engange our critics rather than saying that they're wrong, which
is my natural instinct," he says. Since Eitel came on board in 1998, her staff has doubled, to 95,
one of the company's few areas of expansion. Nike maintains that it has made real progress on the
issue, citing for example a literacy program it started for workers in Indonesia. Even activists
acknowledge engage some basic improvements in working conditions. For instance, Nike has
replaced the solvent toluene, which can produce harmful fumes, with a water-based cement on
most production lines. Still, critics say they haven’t done enough. “You get the sense they’re
flailing around, trying to make enough changes to satisfy critics without making changes that cost
lots of money,” says Medea Benjamin, executive director of Global Exchange, a San Fransisco
based activist group.
Getting Nike back on the fast track will require broad effort. Knight must wean it away from the
Old Nike, sometimes literally. Last year, he carved off the part of the business that makes products
for extreme sports into a separate unit called ACG-short for "all- conditions gear." The ACG group
moved into its own floor in a building away from the main footwear business and built its own
staff, budget, and marketing plan.
Why the separation? Nike has failed to build credibility among fans of nontraditional sports, a
small but important demographic that tends to originate fashion trends among teens. "To certain
kids who are still excited about the NFL, Nike might still be cool. But to the portion of Generation
Y that's individual-oriented and identifies with these newer sports it isn't relevant," says Gary H.
Schoenfeld, CEO of Vans Inc., maker of shoes and clothing for skate boarders, snowboarders, and
surfers.
Even at the Magdalena Ecke Family YMCA Skate Park in Encinitas, Calif., which Nike helped to
rebuild a few years ago with a $100,000 donation, many kids don't know that Nike makes a
skateboard shoe. Some of those who do aren't impressed. "Nikes aren't good at all," says 10-year-
old Jesse Satterfield, who wears Osiris shoes. "They wear down easily, and they're not
comfortable.”
ACG is supposed to change that. Knight put the business under the charge of Gordon O.
McFadden, a 17-year veteran of Norwegian outdoor-apparel maker Helly Hansen. Four of the five
top ACG executives are outsiders, hired from places like Dr Pepper/Seven Up Inc. and Fila
Holding. A skier, snowboarder, and mountain biker himself, McFadden, 49, is developing new
products, such as a $175 snowboarding jacket with a dozen pockets designed to hold such
essentials as gloves, goggles, and head phones. To learn these market, he’s putting 15 or 20
designers in a studio close to the action in Southern California, the epicenter of the skateboarding
and surfing worlds. And ACG will soon take the wraps off a clog-like shoe, the Rufus, that it hopes
will slow the onslaught of “brown shoes”, the hiking boots and other casual footwear that many
young customer prefer over athletic shoes.
But ACG knows that cool new products alone won’t solve Nike’s problems: The company needs
a new image to go with them. ACG plans to start its first big marketing push in June, with new
print ads and in-store promotions. And starting this September, McFadden intends to open dozens
of ACG stores at ski lodges and outdoor resorts. The new stores and products will bear ACG's
logo: an inverted triangle with the letters ACG underscored by a swoosh. McFadden expects
ACG's sales of action-sports products to grow by about 20 % annually, compared with an 8% rate
before the unit was given its independence. "We've got a startup mentality," says McFadden. "They
want us to break rules, be the kind of renegade Nike was when Phil started."
But this isn't the '70s. To project that kind of attitude in the new millennium, a strong Internet
presence is a must. Until recently, however, Nike was clueless when it came to cyberspace. But
last summer, Knight invited a star-studded cast of Net-industry executives to educate Nike
employees about the Web. One speaker, Novell Inc. CEO Eric E. Schmidt, recalls: "Phil got up at
the beginning and said: 'I don't understand all this stuff, but it's incredibly important, and we're
going to get ahead of it. “
Now, Knight meets with his Internet team daily. Topics include ways to drive traffic to Nike.com
and partnerships, such as the one with Ask Jeeves Inc., which recently added an automated
customer-service feature to the site. Nike's electronic commerce site, which has been selling shoes
for almost a year, was jazzed up recently to let customers choose colors and personalize them with
a name or jersey number.
Nike is pushing the envelope in other key areas, too. It now takes Nike, and much of the industry,
about 18 months to design and produce a shoe. Roland Wolfram, hired from SBC's Pacific Telesis
unit in 1998, is trying to cut that to 12 months, and even shorter on some products. "Traditionally,
Nike has relied on its product excellence and brand moxie, but we also want to have this other leg
of the stool to stand on," says Wolfram.
Shortening the design and manufacturing cycle has implications up and down the sales chain. Right
now, Nike has to place its bets far in advance of actual demand, leaving it vulnerable to swift
changes in fashion. Last year, for instance, it ordered 400,000 pairs of one of its sports sandals
from its contract factories. But when the actual retail orders came in months later, they totaled
more than a million pairs, leaving Nike scrambling to fill the demand.
Nike is also putting in place an automatic replenishment system that ships out basic, high-volume
merchandise without waiting for retailers to place orders. In the past, retailers often ran out of
simple polo-style tops or shorts. That hurt sales of higher-priced items like halter tops, since
consumers frequently purchase basic and fashion items together. Nike is now selling $100 million
of merchandise a year through auto-replenishment. Retailers say the improvements have smoothed
out many of the supply problems that dogged the company in 1998. “They’re delivering on time,
something that was a real challenge,” says John Douglas Morton, CEO of Denver-based Gart Sport
Co., which operates 130 apparel and equipment stores.
If this sounds like a more disciplined and calculated approach to doing business, it is. A good part
of the enforcement has fallen to Clarke, a 20-year Nike veteran who became president in 1994. He
has spent much of the past two years increasing financial accountability around the company to
make employees more conscious of sales performance and expenses. In 1998, Nike gave managers
in each region-the U.S., Europe, Asia, and Latin America their own profit-and-loss statements
and now ties compensation more closely to performance.
As part of the new emphasis on financial responsibility, Knight and Clarke are pounding home the
need to cut costs. Layoffs and cutbacks have hit every area of the company. Nike last year held its
annual executive retreat in Beaverton- a far cheaper alternative to the seaside resort in the
Netherlands where managers gathered a few years back. Little things count, too, these days: In the
past, Nike paid its advertising agency to assemble videos highlighting new products for the retreat.
Last year, it did that work itself.
Knight admits that his unconventional style-he was known to disappear from day-to-day
operations for weeks at a time -contributed to his company's current predicament. In April, 1998,
Knight summoned the headquarters staff to "the Bo," Nike's gymnasium named for former
football/baseball star Bo Jackson. There, Knight apologized for taking his eye off the ball during
Nike's boom years and failing to prepare it for the rough times that followed (Exhibit 2).
Despite that mea culpa, Knight shrugs off any suggestions that the struggles of the past two years
have transformed him personally. But he acknowledges that he has had to swallow some pride.
"There's a fine line between being a certain size and being a bully. And we don’t want to be a
bully,” he says. He acknowledges that creating a big-company culture “is not as much fun, but I
think it’s part of the evolution you’ve got to go through.”
Knight hasn’t given up hope that his company can regain its old stride. “I don’t think we’re middle-
aged, I think we’re in our twenties. I think there is great opportunity for growth,” he says gamely.
But putting Nike back on track will require a delicate balancing act-taming the company’s brash,
in-your-face style while injecting a new sense of vigor. Nike’s CEO likes to point out that he has
weathered other rough patches. "This is the fourth down turn in 18 years as a public company. I
said going into the 1990s that if we can get through it with only two down- turns, we'll have a great
decade. And I'll look forward to 2000 through 2010 coming up with the same statement." That
may be the only good thing about slowing down as you get older-it gives you a chance to put things
in perspective.
Epilogue
Nike marketing execs couldn't have written a better script themselves. On June 30, Brazilian
superstar Ronaldo, sporting a pair of special lightweight, silver-coated Nike soccer shoes, knocked
in two goals in the final game to win the World Cup for his soccer-mad country. The 2-0 victory
over Germany was sweet redemption for Ronaldo, who bad battled back from career-threatening
injuries. And it marked a coup for Nike Inc., which sponsored the Brazilian national team and its
star in a bid to crack the $2.5 billion global soccer-gear business dominated by German rival
Adidas-Salomon.
That's just the sort of deft footwork that Nike will need if it's going to break free from a moribund
U.S. sneaker market. The Beaverton (Ore.) giant still gets more than half of its nearly $10 billion
in annual sales from shoes. And much of the news lately has been grim: U.S. shoe sales were flat
in the three months ended Aug. 31, and orders for future quarters dropped 3 %. Factoring in a $266
million charge to reflect goodwill on past acquisitions, Nike reported a $48.9 million net loss. The
biggest shock of all; Nike's top customer, Foot Locker Inc., canceled orders for as much as $250
million worth of business. Now Nike has to scramble to find retailers to take all those $160 Vince
Carter Shox and $200 Air Jordans.
But the gloom is deceiving. Behind the scenes, Nike is finally making headway in its year-long
quest to get back on the growth track. A few short years after some pronounced the brand finished
on the basis of tepid product launches, shifting customer tastes, and its ties to Third World
sweatshops, Nike appears to be displaying financial discipline for the first time and proving that it
can squeeze growth out of something other than shoes.
Even Nike apparel, a chronic under-achiever, finally is making significant contributions. Shirts,
shorts, and other clothing generated $2.9 billion in sales for the fiscal year ended May 31, or 30 %
of Nike's total, and kicked in its first meaningful profit. Global soccer revenues rose 24% , to $450
million, last year, a dramatic jump considering Nike had virtually no soccer credibility-or sales-at
the time of the 1994 World Cup. Even in golf, Nike seems to be on the way to becoming a power,
on the strength of its sponsoorship of Tiger Woods and the refinement of a lineup that includes
balls, clubs, and shoes.
The result: Nike returned to double-digit profit growth in fiscal 2002, with net income rising 12%,
to $663.3 million. Profits should grow another 13% in the year ending May 31-albeit on only 5%
sales growth, according to Wells Fargo Securities (Exhibit 3). "I think now we're a pretty well-run
$10 billion company, and we're ready to grow again," says Nike Chairman and CEO Philip H.
Knight.
Even Nike's vaunted image-making machinery-so crucial to the rise of the brand in the 1990s--
appears to be back on track. Whimsical television advertisements that show an entire city engaged
in a giant game of tag have helped soften a brand that was too often associated with hard work
rather than play. For the World Cup, Nike created global buzz with an ad that pitted its stable of
soccer stars in street-style matches inside a steel cage aboard a tanker.
Knight, the enigmatic company co-founder, finally acknowledged early last year that he needed to
shake things up. After a torrid run in the mid-1990s-capped by a 50% burst in sales during 1997-
the company simply outgrew its inventory and other systems. By 1999, sales had dropped, and
profits, which peaked at $795 million in 97. fell to $451 million. Having accumulated the titles of
chairman, CEO, and president, Knight admits he was part of the problem: "We got to be a $9
billion company with a $5 billion management."
The turnaround began when Knight handed over day- to-day control to a pair of Nike veterans, co-
Presidents Mark G. Parker, 47, and Charlie Denson, 46. While yoking two ambitious execs can be
a recipe for indecision, or worse. Parker and Denson so far have forged a smooth relationship,
insiders say. Parker, originally a shoe designer, brought to market such innovations as Nike's
flexible Presto and spring-soled Shox. Now he is leading an assault on sub-$100 footwear. Denson,
meanwhile, used his sales background to pare down a near bilion-dollar inventory bulge, which
threatened to implede the supply chain. Among other things, he installed new computer systems
to better track goods.
Although Knight has stuck with insiders for the top posts, he has reached outside for some key
hires. They have blended surprisingly well with Nike's notoriously insular, athlete iminated
culture. Chief Financial Officer Donald W. Bi hired from PepsiCo Inc. in 1999, has fostered fiscal
discipline at a company that loves to spend money on product development and marketing. For the
first time in a decade. Nike's gross margin last quarter exceeded 40% of revenues. Meanwhile,
Mindy Grossman, a fast-talking New Yorker hired two years ago from the Polo Ralph Lauren
Corp.. is pumping life into Nike apparel. She has slashed lead time to put new outfits on the shelf
from 18 months to 11 and is launching a line of active lifestyle fashions. “I think they are bridging
lifestyle and sport a lot better and creating more fashionable looks and fabrics,” says Shawn
Neville, CEO of retailer Footaction.
Nike will need to draw on all of its new discipline and brand strength to stay one step ahead of
fierce shoe competitors such as Adidas and New Balance Athletic Shoe Inc., which have been
gaining U.S. market share. The tense standoff with Foot Locker, which accounts for 11% of Nike's
sales, didn't help. The mess, sparked by slow sales of Nike's premium shoes, will take months to
clear up. A bigger challenge, though, is to prove Nike can be a force in lower-priced shoes.
Whereas some teens once bought eight pairs of pricey shoes a year, cell phones and other gizmos
now compete for their money.
That erosion of Nike's core business is a big reason its shares are down 30% since hitting a two-
year high of $63.99 in late March. To respond, Nike is offering a relaunch of the classic Air Jordan
9 at $125. Admitting that the initial design and high price of the Vince Carter Shox doomed sales,
it will launch the redesigned second edition at the NBA All-Star Game in February. Says a sobered
Eric Sprunk, Nike's footwear vice-president: "We're not going to $200. We probably pushed that
too aggressively."
Fortunately, Nike is now much less dependent on the U.S. market. Its overall international
revenues have gradually grown to $4.4 billion, now nearly matching U.S. revenues of $4.7 billion.
In the most recent quarter, Nike's sales grew 15% in Europe and 24% in Asia. A key driver of
overseas growth will be soccer footwear and equipment. Last spring, to coincide with the World
Cup, Nike introduced a line of radically designed shoes, jerseys, and equipment, including the
Mercurial Vapor, worn by Ronaldo. It spent $155 million on endorsements and $100 million on
ads, an interactive Web site, and 13 mini theme parks scattered across the globe.
The payoff? Nike believes global soccer revenues should hit $1 billion within five years. Even
more promising, Nike seems to be recapturing excitement among younger consumers. "When
you're walking down the street, people notice ooh, Nikes. They don't remark on Adidas," says
Fahri Gurlir, a 14-year-old German soccer fan from Frankfurt. Nike isn't over the hump yet. But
far from the basketball court, it seems to be getting its head back into the game. By Stanley Holmes
in Beaverton, Ore., with Christine Tierney in Frankfurt.