Can Nike Still Do It?

CEO Phil Knight is struggling to rebuild the shoemaker from top to bottom

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 the strong dollar is resulting in unfavorable currency translations. 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."

NEW PERSPECTIVE. 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, was the 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 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 skateboarders and snowboarders. Others are revamping Nike's manufacturing and logistics systems. Even the swoosh is no 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 a 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 earnings increase of 28% this year, still far below the glory days in 1996 and 1997 when Nike racked up gains of 38% and 44%, respectively.

TATTOO, TOO. 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 people 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 of our evolution, we've chosen to engage 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 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 Francisco-based activist group.

NOT RELEVANT. Getting Nike back on the fast track will require a 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 skateboarders, 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 headphones. To learn these markets, 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 customers 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 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.

"REAL CHALLENGE." 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 Sports 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.

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 downturn in 18 years as a public company. I said going into the 1990s that if we can get through it with only two downturns, 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.