Mini Case 8

Page 446

DURING THE LAST decade, Nike’s annual revenues doubled and by 2015 was over $30 billion. Having a globally recognized brand, Nike is the undisputed leader in the athletic shoe and apparel industry. The numbertwo adidas has some $19 billion in sales, while recent entrant Under Armour reports revenues of $3 billion. Nike is tremendously successful, holding close to a 60 percent market share in running and nearly a 90 percent market share in basketball shoes and apparel.  Nike Co-founders: Bill Bowerman and Phil Knight The Beaverton, Oregon, company has come a long way from its humble beginnings. It was founded by University of Oregon track and field coach Bill Bowerman and middle-distance runner Phil Knight in 1964 and called Blue Ribbon Sports. In 1971, the company was renamed Nike (Greek mythology’s goddess of victory) and the now iconic “swoosh” was designed by a Portland State University student. Coach Bowerman was a true innovator because he constantly sought ways to give his athletes a competitive edge. He experimented with many factors affecting running performance, from different track surfaces to rehydration drinks. Bowerman’s biggest focus, however, was on providing a better running shoe for his athletes. While sitting at the breakfast table one Sunday morning and absentmindedly looking at his waffle iron, Bowerman had an epiphany. He poured hot, liquid urethane into the waffle iron—ruining it in the process but coming up with the now famous waffle-type sole that not only provided better traction but was also lighter than traditional running shoes. After completing his undergraduate degree at the University of Oregon and serving in the U.S. Army, Phil Knight entered the MBA program at Stanford. One entrepreneurship class required him to come up with a  business idea. He wrote a term paper pape r on how to disrupt the leading lead ing athletic shoemaker, adidas. The research question he came up with was, “Can Japanese sports shoes do to German sports shoes what Japanese cameras have done to German cameras?”1 At that time, adidas athletic shoes were the gold standard. They were also expensive and hard to find in the United States. After several failed attempts to interest Japanese sneaker  makers, Knight struck a distribution agreement with Tiger Shoes. After his first shipment arrived in the United States, Phil Knight sent some of the running shoes to his former coach Bill Bowerman, hoping to make a sale. To his surprise, Bowerman replied that he was interested in becoming a business partner and contributing his innovative ideas on how to improve running shoes, including the waffle design. With an investment of $500 each and a handshake, the venture commenced.

Brazil’s National Soccer Team, World Cup 2014 in Brazil © Jorge Silva/Reuters/Corbis Creating Heroes Based on a highly successful string of innovations including Nike Air, by 1979 the company had captured more than a 50 percent market share for running shoes in the United States. A year later, Nike went public. In 1984,  Nike signed Michael Jordan—whom many consider the greatest basketball player of all time—with an unprecedented multimillion-dollar endorsement deal. Rather than spreading its marketing budget more widely as was common in the sports industry at that time, Nike made the unorthodox move to spend basically its entire  budget for a specific sport on a single star athlete. Nike sought to sponsor future superstars that embodied an unlikely success story. Michael Jordan did not make the varsity team as a junior in high school, only to become the greatest basketball player ever. Nike’s Air Jordan basketball shoes are all-time classics that remain popular to this day. Frank T. Rothaermel prepared this MiniCase from public sources. This MiniCase is developed for the purpose of  class discussion. It is not intended to be used for any kind of endorsement, source of data, or depiction of  efficient or inefficient management. All opinions expressed, all errors and omissions are entirely the author’s. Revised and updated: August 27, 2015. © Frank T. Rothaermel. Page 447 In the 1990s and 2000s, Nike continued to sponsor track and field stars such as Marion Jones as well as Kobe Bryant in basketball. With the help of major celebrity endorsements, Nike was also able to move on to different sports and their superstars, including golf with Tiger Woods, cycling with Lance Armstrong, soccer with Wayne Rooney, and football with Michael Vick.  Nike is less about running shoes or sports apparel than about unlocking human potential. This is captured in  Nike’s mission “to bring inspiration and innovation to every athlete in the world” (and “if you have a body, you are an athlete”).2 Nike uses its heroes to tell a story whose moral is that through sheer will, tenacity, and hard work, anyone can unlock the hero within and achieve amazing things. Nike will help everyone become a hero.  Just Do It! This type of mythical brand image has allowed Nike to not only enter but often dominate one sport after another, from running to ice hockey. It spends more than $1 billion a year sponsoring athletes. Nike picks athletes that succeeded against the odds—cancer survivor Lance Armstrong, double amputee “blade runner” Oscar Pistorius, and other athletes hailing from disadvantaged backgrounds.  Nike astutely focuses on its core competency in athlete sponsorship and design, while it outsources non-core activities such as manufacturing and much of retailing. To create heroes, Nike has to engage in a number of  activities: find athletes that succeed against the odds; identify them before they are well-known superstars; sign the athletes; create products that are closely linked with the athlete; promote the athletes or teams and Nike  products through TV ads and social media to create the desired image; and so on. Each activity contributes to the relative value of the product and service offering in the eyes of potential customers and the firm’s relative cost position vis-à-vis its rivals. Over time, Nike developed a deep expertise in creating heroes. More importantly, having consistently better expectations of the future value of resources allows Nike not only to shape the desired image of the athlete, but also to capture some of the value these athletes create.

Oscar Pistorius (left), and Lance Armstrong (right), some of Nike’s past celebrity endorsements (left) © Ian Walton/Getty Images; (right) © Epa European Pressphoto Agency b.v./EPA/Alamy Although this core competency made Nike highly successful, it has not been without considerable risks. Repeatedly, Nike’s “heroes” have become unmasked as cheaters, frauds, and criminals, some of whom have committed serious felonies, such as (culpable) homicide. Long-time CEO and chairman Phil Knight declared that scandals surrounding its superstar endorsement athletes are “part of the game.”3 In some instances, Nike continued to sponsor its athletes involved in various scandals, while in others it terminated its lucrative endorsement contracts. Nike continued to sponsor NBA star Kobe Bryant who was cleared of alleged rape charges. After Tiger Woods was engulfed in an infidelity scandal, Nike continued to sponsor the golf superstar. In 2007, Nike ended its endorsement contract with NFL quarterback Michael Vick after a public outcry and his subsequent felony conviction of running a dog-fighting ring and engaging in animal cruelty. In 2011, after  serving a prison sentence and restarting his career at the Philadelphia Eagles, Nike signed a new endorsement deal with Michael Vick. In 2012, Nike terminated its long-term relationship with disgraced cyclist Lance Armstrong. Just before Armstrong’s public admission to doping in an interview with Oprah Winfrey, Knight answered, “Never say never,” when asked if Nike would sponsor Armstrong again in the future. In 2013, Nike removed its ads with Oscar Pistorius and the unfortunate tagline “I am the bullet in the chamber,” after the homicide charges against the South African track and field athlete. Page 448 In 2014, Nike got entangled in the FIFA (the world governing body of soccer) bribery scandal. It began 20 years earlier when Nike decided to gain a stronger presence in soccer after the 1994 World Cup was held in the United States. In 1996, Nike signed a long-term sponsorship agreement with the Brazilian national team worth hundreds of millions of dollars. This was a huge win for Nike because soccer has been the basis of adidas’ success, much like running and basketball has been for Nike. Moreover, Brazil won the tournament five times (more than any other nation) and is the only team to have played in every tournament, which is only held every four years.  Nike is now alleged to have paid some $30 million to a middleman, who used that money for bribing soccer  officials and politicians in Brazil. This middleman—Jose Hawilla—has admitted a number of crimes including fraud, money laundering, and extortion related to the FIFA soccer investigation by U.S. prosecutors. Time and time again Nike’s heroes have fallen from grace, and the company itself has fallen under suspicion of  wrongdoing. Clearly, Nike’s approach in building its core competency of creating heroes is not without risks. Too many of these public relations disasters combined with too severe shortcomings of some of Nike’s most celebrated heroes could damage the company’s reputation and lead to a loss of competitive advantage. As Nike veers from one public relations disaster to the next, disappointment with the brand and its promise may eventually set in, causing customers to go elsewhere. DISCUSSION QUESTIONS 1.

The MiniCase indicates that Nike’s core competency is to create heroes . What does this mean? How did  Nike build its core competency? Does it obey the VRIO attributes (valuable, rare, inimitable, and organized to capture value based on the resource-based view of the firm)?

2. What would it take for Nike’s approach to turn from a strength into a weakness? Did this tipping point already occur? Why or why not?

3. What recommendations would you have for Nike? Can you identify a way to reframe the competency of  creating heroes? Or a new way to think of heroes, teams, or sports that would continue to build the brand?

4. If you are a competitor of Nike (such as adidas, Under Armour, New Balance, or Li-Ning), how could you exploit Nike’s apparent vulnerability? Provide a set of concrete recommendations. Endnotes 1 As quoted in: “Knight the king: The founding of Nike,” Harvard Business School Case Study, 9-810-077, p. 2. 2 http://help-en-us.nike.com/app/answers/detail/a_id/113/p/3897. 3 According to Reuters, cited in: www.sportbusiness.com, December 15, 2009. Sources: This MiniCase is based on: “Nike’s bold push into soccer entangled it in FIFA probe,” The Wall Street   Journal, June 4, 2015; “The big business of fairy tales,” The Wall Street Journal, February 14, 2013; Sachs, J. (2012), Winning the Story Wars (Boston, MA: Harvard Business School Press); Nike, Inc.,  History and   Heritage, http://nikeinc.com/pages/history-heritage; and Halberstam, D. (2000), Playing for Keeps: Michael   Jordan and the World  (New York: Broadway Books).