Nike - A Case Study

Anyone’s shortlist of the world’s leading brands would surely include Nike, the global icon for the athletic set. Anyone under the age of 20 probably thinks Nike has been around since the beginning of time, but in reality the story of Nike is only three decades old. While today’s consumers know Nike as a broad-based athletic footwear, equipment and apparel company, Nike’s beginning was rooted exclusively in shoes for elite distance runners.

The story of Nike provides a compelling case study of how a company entered one target market, then used its success therein as a springboard to expand into other segments. Here, we look in greater depth at Nike’s entrepreneurial roots, at how the capabilities Nike developed in running shoes enabled the company to expand into other market segments, and at how a company started on a mere $1000 investment became one of the world’s best known brands.

One waffle iron plus two entrepreneurs equals better shoes for distance runners

It was 1964, and Phil Knight was still thinking about the business plan he had developed for a class assignment at Stanford’s Graduate School of Business. Knight’s plan had argued that there was an opportunity to build a business around American-designed, Japanese-made shoes for distance runners. Knight, a former distance runner at the University of Oregon with a 4:10 personal best in the mile, and Knight’s former track coach at Oregon, Bill Bowerman, thought the German-made shoes everyone wore at the time were too expensive. More crucially, in their view the German shoes weren’t really designed with the unique needs of distance runners in mind.

Distance runners, especially elite distance runners like Knight and others that Bowerman had coached, had different needs in athletic footwear from other athletes, different even from sprinters who did most of their running on tracks. Distance runners ran several miles every day, often more than 100 miles a week. Most of these miles were run on dirt trails, whose uneven surfaces and the occasional rock led to sprained ankles, or on country roads, where the miles and miles of pounding could lead to shin splints or stress fractures of the bones in the feet, ankles and legs.

Bowerman, a lifelong tinkerer and innovator, believed distance runners could benefit from shoes that provided greater cushioning (against the repetitive impact from the miles and miles of training), that gave better lateral stability (to protect against ankle sprains), and that were more flexible and lighter than the shoes then on the market (to improve his runners’ race times).

Knight’s work at Stanford had shown him that athletic shoes could be sourced from factories in Asia at costs that were low enough to compete favourably with the dominant German competitors. The question, then, was how to design a shoe that would meet distance runners’ needs. The now legendary answer was found in Bowerman’s kitchen, where, with his wife’s waffle iron and some latex, he created the waffle sole, which, together with a lightweight nylon upper, would revolutionize the running shoe.

Knight, now with a day job as an accountant, and Bowerman each chipped in $500 to form a new company, Blue Ribbon Sports, that would import Bowerman-designed shoes made by Onitsuka Tiger in Japan. There was no angel investor, no venture capital, and no inkling of the potential that lay ahead. In 1964, Blue Ribbon Sports sold about 1300 pairs of running shoes, generating a mere $8000 in revenues. During their first five years in business, Knight’s aging station wagon could be found at track meets all over California and the Pacific Northwest, where Knight peddled his shoes to an increasingly accepting market. As runners wearing Tigers won more and more races, word spread. By 1969, with the business having grown to 20 employees and a handful of retail outlets, Knight quit his day job and began to devote all his energies to the growing business.

Creating a brand

At the US Olympic trials in 1972, Blue Ribbon Sports introduced its Nike brand after a dispute led to the break-up of the relationship with Onitsuka Tiger. In the 1972 Olympic marathon that soon followed, four of the top seven finishers wore Nike shoes. By 1974, after ten years of effort, the Nike shoe with the waffle sole had become America’s best-selling training shoe. Nike was on the map at last, and in 1978 Blue Ribbon Sports changed its name to Nike.

One segment leads to another

By the mid-1970s, Nike had developed some capabilities that would serve it well. It had mastered low-cost outsourced production, using factories in Asia that could produce the innovative shoes created by Knight’s designers. These designers had learned how to build relationships with elite athletes to identify their footwear needs and design shoes that would not only contribute to better performance but also protect them from injury. Knight and his team realized that these capabilities could now be applied in other athletic shoe segments to develop high-performance shoes tailored specifically to the needs of each sport.

In 1978, tennis great John McEnroe signed with Nike, and tennis became another growth business. That same year, the Boston Celtics and the Los Angeles Lakers began wearing Nike’s new basketball shoes. By 1983, Nike had expanded its offerings to include apparel as well as shoes. In 1985, a promising rookie basketball player named Michael Jordan signed a deal with Nike for a new line of basketball shoes based on the air-cushioned technology developed by Nike for its running shoes. Air Jordan shoes became the envy of every American teenager, as Jordan became the best player ever in basketball.

Soaring results

By 1985, after 20 years in business, Knight’s and Bowerman’s little company reached the billion-dollar mark in worldwide sales, and Nike was acknowledged as the technological leader in the athletic footwear industry. Though it stumbled for a time in the late 1980s, as Reebok won the aerobics market with sleek, stylish shoes that consumers preferred to Nike’s clunky, more functional designs, Nike regained its touch by renewing its focus on the customer and understanding both the psychological and functional benefits that its brand offered. Its progress continued:

• In 1990, Knight said: ‘Our goal is simple: to be the market share leader and the most profitable brand in all 39 footwear apparel and accessory lines in which we compete.’
• By 2000, with worldwide revenues having passed the $10 billion mark, with 22,000 employees doing business in 120 countries, and with more than a one-third share of the world’s athletic footwear market, Nike was named the number-one consumer goods and services company to work for in Forbes magazine’s annual ranking.

Showing that it had not forgotten its running shoe roots, Nike also won Smart Money’s readers’ choice award for best running shoe. Nike was still committed to providing athletes in virtually every sport imaginable with the very best performance footwear.

Lessons learned from Nike

From Nike, we’ve seen how entry into one segment, if successful, can lead to success in additional segments. The additional value that such a successful entry offers can constitute an important part of the value that entrepreneurs bring to investors who back them. Understanding these options before writing a business plan and articulating them effectively can help entrepreneurs pitch the upside of what they propose to investors, thereby making their opportunity more compelling.

Unlike the Miller Lite story, where the entrepreneurial behaviour took root in an established firm, Nike’s story began with two runners passionate about running. And unlike iMode, where the technology came first and made the concept possible, in Nike’s case the venture was driven by customers’ needs, needs that Knight and Bowerman, as runners themselves, knew intimately.

Nike learned its trade in one segment, elite distance runners, clearly a niche market then and now. There it built crucial capabilities:

• The art of understanding the needs of such athletes.
• The engineering of products that appealed to these athletes.
• The business of sourcing these products in low-cost offshore manufacturing locations.
• The marketing savvy to build on the performance of these runners to attract interest from the rest of the athletic pyramid.

Nike then used these capabilities when entering other segments. In almost every segment it entered, Nike won the match.

Nike’s segment-by-segment success raises several questions that entrepreneurs should ask:

• What can I learn from this first market segment that will allow me to make waves in additional segments?
• What other segments exist that could benefit from a related offering?
• Can we develop capabilities that are transferable from one segment to another?

 

By answering these questions, entrepreneurs can identify additional value in the opportunity at hand – value that lies beyond the market targeted originally. As the Nike case history shows, that extra value can be more than small change!