The Unauthorized Story of the Men Who Played There
Swoosh
(JULIE STRASSER and LAURIE BECKLUND/Collins/April 1993
592 pages/$18.45)
Swoosh
The Unauthorized Story of the Men Who Played There
The founder of Nike was Philip Hampson Knight. Knight acquired the nickname ‘‘Buck’’
early in life and it stuck with him. He attended the University of Oregon majoring in
accounting, and later went to Stanford School of Business. While at the University of
Oregon, he joined the track team and was coached by Bill Bowerman who was
legendary for developing successful mile track runners. Phil was a very good runner,
and he raced with a lot of success.
As luck would have it, though, his on-track performance was eclipsed by another
university team member Jim Grelle who later went on to represent the United States at
the Olympics.
While at Stanford, Phil Knight wrote a paper about a small business idea as an
assignment. In the paper, he discussed the concept of what would happen if the
Japanese did to German running shoes what they had already done to German
cameras. Knight concluded his paper by saying that with cheap Japanese labor, an
American distributor could sell track shoes that rivaled Adidas in quality but undercut
them in price.
Before settling into a career somewhere in corporate America, Knight decided to get
some overseas experience. With the financial help of his family, he had enough money
to travel to the Far East. In 1962, Knight ended up in Japan, where he immediately fell in
love with the country and the people. While there, he noticed some imitation Adidas
running shoes in a sporting goods store. The shoes were Tiger brand, manufactured by
Onitsuka Co. Ltd of Kobe.
Just before leaving Japan, Phil went and visited Onitsuka Co. He introduced himself as
an American shoe importer, and was pleasantly surprised to receive a warm welcome.
Knight assured the Japanese company their shoes looked good, and promised to place
an order when they sent some samples of a new leather shoe they were developing.
When they asked the name of Phil Knight’s company, he replied, ‘‘Blue Ribbon Sports’’ the first name that came to mind.
Unbeknown to Knight, Kihachiro Onitsuka, the founder of Onitsuka Co. Ltd. had just
spent a few months studying the American market. Many Japanese companies used
the large trading companies to represent them overseas, but Onitsuka had decided
instead to appoint American distributors with experience in specific sports. Onitsuka
saw Knight as the ideal way to move into the American market for running shoes. At the
time, Onitsuka manufactured 66 shoe models and had annual sales of around $8
million.
When Knight returned from his trip, he approached his old track coach, Bill Bowerman,
and asked if he would like to become involved in a company importing Tiger brand
running shoes from Japan. Bowerman agreed, seeing it as a way to produce good
running shoes for his track team. He also told Knight he expected to be cut in on the
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financial benefits in some way or another.
Bowerman and Knight decided to form a legal business partnership called Blue Ribbon
Sports. They each contributed $500 to start the company and shook hands. There were
no business plans, no contracts, no lawyers - just a handshake and a shared interest in
the sports shoe business.
Blue Ribbon placed its first order for 300 pairs of Tiger shoes in February 1964. The
order was worth $1,107 - $3.69 a pair. They hoped to sell the shoes for $6.95 a pair,
which would undercut Adidas. It took around four months for that first shipment of shoes
to be sold out.
There was a hiccup when Blue Ribbon tried to place an order for another 1,000 pairs of
shoes. Onitsuka told Knight they already had an American distributor, based in New
York, and that Blue Ribbon would have to work through him. Knight jumped on a plane
and went back to Japan to see Onitsuka personally, and eventually succeeded in having
Blue Ribbon designated as Onitsuka’s exclusive agent for the 13 western states of the
United States of America. Onitsuka and Blue Ribbon Sports signed a one page
exclusivity agreement.
Adidas, based in Herzogenaurach, Germany, absolutely dominated the U.S. and world
markets for athletic shoes in the 1960s. Adidas shoes featured prominently in the
Soccer World Cup, the Olympics and other major sporting events.
Adidas was run by Adi Dassler. His brother, Rudi Dassler, had an argument with Adi
and started the Puma athletic shoe company on the other side of the same German
town. These two companies had been the bitterest of enemies ever since, and
competed vigorously against each other. In the early 1960s, this rivalry had reached a
stage where both Adidas and Puma were starting to pay athletes to wear their shoes at
important competitions.
Blue Ribbon Sports had been started by middle distance runners in Phil Knight and Bill
Bowerman. Their first employee, Jeff Johnson, was also a middle distance runner.
Middle distance events (like the mile) require speed, endurance and an ability to handle
good tactics. These traits would later come to epitomize the Blue Ribbon Sports
approach to business.
Jeff Johnson lived for running. When Phil Knight sent him a pair of Tiger running shoes
in January 1965, he’d just graduated from university and was looking for a career which
would still leave him enough time to do some serious running training.
Jeff decided to sell a few pairs of Tiger running shoes while he was healing from a torn
tendon. ‘‘I’m not so completely gung-ho, but I just haven’t anything better to do at the
moment,’’ he wrote to Phil Knight as he ordered 50 pairs of Tiger shoes.
When the shoes arrived, Johnson headed off to a road race with a few pairs of Tiger
shoes stuffed in the back of his VW bug. To his surprise, he sold 13 pairs of shoes his
first day. Johnson suddenly realized people liked the shoes, and there may be a
business opportunity in them after all.
At that time, Blue Ribbon Sports was a small operation. Phil Knight worked full time as
an accountant, and ran Blue Ribbon after hours and on evenings. Bill Bowerman was
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still coaching the University of Oregon track team. Jeff Johnson took on a full time job as
a social worker, and sold shoes at evenings and on weekends.
Blue Ribbon Sports sold $20,000 of Tiger shoes in its first year of operation. By the end
of 1965, Jeff Johnson had left his social worker job and was working full time at selling
athletic shoes on commission, with a $400 a month advance. He turned his apartment
into a shoe store and forged ahead enthusiastically.
Johnson came up with several innovative ideas for promoting Tiger shoes, including
printing T-shirts with a large Tiger logo. This was actually a novel advertising concept in
the 1960s. Johnson also talked Knight into planning ahead in more detail. As a result,
Knight again went to see Onitsuka in Japan, and signed a three-year exclusive contract
to distribute Tiger track shoes throughout the entire United States of America.
In late 1966, Blue Ribbon Sports opened its first retail shop in Santa Monica located
between a beauty salon and a termite exterminator. Jeff Johnson became the store
manager, in addition to attending track meets, running the mail order business and
doing all the promotional work. Johnson would later go on to start Blue Ribbon’s first
East Coast store in Natick, Massachusetts.
Meanwhile, Bill Bowerman visited Arthur Lydiard in New Zealand to learn more about a
technique for lifetime conditioning that Lydiard had developed which he called jogging.
Bowerman returned from New Zealand and started a jogging group in Eugene. Before
long, jogging became a national craze in the United States.
Bowerman and Knight spent a lot of time feeding ideas back to Onitsuka. At one time,
Bowerman cannibalized two Tiger shoes taking the best features from each, pinning the
composite together and sent it over to Japan asking that Tiger shoes start making that
model. They duly did so and the shoe that resulted turned out to be a great success.
Jogging and the design of athletic shoes were still in their infancy at that time. Studies
were just starting to be published in the late 1960s which detailed the knee and foot
injuries which could be caused by poor shoe design. Blue Ribbon took notice of these
studies, and passed numerous ideas back to Onitsuka.
Meanwhile, Blue Ribbon continued to grow and expand. Sales were doubling every year,
and reached $400,000 in 1969. Phil Knight left his job as an accountant to spend more
time building the company. He opened a combined shop and office in Portland, Oregon
and took on a job teaching part time at Portland State. By this stage, Blue Ribbon had
12 full-time employees, a number of friends who would help out as required, a far-flung
force of commission sales people and a network of runners who would give referrals for
their friends.
The Blue Ribbon staff were long on enthusiasm but short on organization, experience
and expertise. Everything was in a constant state of chaos. Inventory counts were either
non-existent or so far out they were useless. Nobody ever bothered to match what was
shipped against what had been ordered - they just sold whatever was in stock.
Company expenses were put on anybody’s credit card which was still under its credit
limit. Overall, Blue Ribbon Sports ran a casual operation.
At the Mexico Olympics in 1968, Adidas and Puma made a number of under-the-table
payments to athletes to have them wear their shoes while competing. Blue Ribbon
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Sports was too small to do the same, but the 1968 Olympics marked the end of the
period of the amateur competitor and the beginning of the financially lucrative
endorsement deals which would later command widespread attention.
Mr. Onitsuka called into Los Angeles on his way back from the Mexico Olympics and
met with Knight. Onitsuka suggested they form a joint venture company to promote
Tiger shoes in the U.S. on a larger scale. Knight agreed, but the arrangement was later
changed instead to an extension of Blue Ribbon’s exclusive contract until the end of
1972.
Blue Ribbon Sports was now having serious problems financing shoe orders. The
problem was shipments usually bore little resemblance to the orders which had been
placed. Blue Ribbon also had to pay off letters of credit before the shoes were sold. The
company had a severe cash shortage and needed more capital to be able to buy shoes
so as to generate more money.
In 1970, Knight decided to move out of retailing and instead concentrate on wholesaling
athletic shoes to retailers. He also toyed with the idea of making a public offering of
about 30-percent of the company to raise equity funding. However, with the United
States in a recession, this idea was quietly dropped.
With the banks becoming touchy about financing Blue Ribbon’s ongoing shoe
shipments, Phil Knight read about the Japanese trading companies. He contacted one
of these trading companies, Nissho Iwai, who offered to finance a $350,000 shipment of
shoes for a 2-percent commission. The only problem was that Onitsuka in Japan would
not agree to the involvement of a trading company.
In fact, Onitsaku sent his export manager to the United States to talk with other potential
distributors who had contacted his company asking for Tiger shoe distribution rights in
the United States. Knight realized that could mean the end of Blue Ribbon Sports,
despite the fact that he had an exclusive contract which was due to run for another two
years.
Phil Knight and Bill Bowerman decided it would be better to create their own brand of
shoes and go it alone rather than continue to be subject to the wills and whims of a
manufacturer. The only thing they needed now was enough time and money to put the
plan into action. The problem was they had to keep Blue Ribbon operating while they
secured a new manufacturer without letting
Onitsaku know what their plans were. To meet Blue Ribbon’s short-term finance
requirements, Knight enlisted the aid of one of his old accountancy associates, Del
Hayes. He arranged a private debenture offering of $200,000 spread over thirteen
investors. The debenture holders received around 35-percent of Blue Ribbon Sports
which they could sell when the company went public.
Knight approached an art student he knew and asked her to come up with some
designs for a name and logo for the new shoe Blue Ribbon wanted to start
manufacturing. The student came up with a design that looked a bit like a check mark.
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When a customer later wrote asking for a pair of shoes with ‘‘the Swoosh fiber’’, the new
check mark design became known around Blue Ribbon Sports as the swoosh.
When it came time to start manufacturing packing boxes, Knight suddenly realized he
needed a name for the brand. A few choices were discussed, but none seemed right.
One night, Jeff Johnson suddenly thought of ‘‘Nike’’ - the winged goddess of victory
from Greek mythology. The name initially received a lukewarm reaction from Phil Knight,
but in the absence of anything better they decided to use it.
Knight made contact with a Mexican shoe factory and commissioned them to
manufacture the first Nike shoe - an all leather football/soccer shoe with an injection
molded sole and cleats. The only problem was that when the shoe finally hit the market,
Blue Ribbon suddenly realized nobody in Mexico had tested the shoe in the cold
temperatures of North America. The first Nike shoes cracked apart quite regularly, and
9,000 pairs from the initial order of 10,000 had to be sold at only $7.95 each just to
recoup something.
Knight again contacted the Japanese trading company Nissho Iwai who agreed to
provide $650,000 worth of credit to launch the Nike brand of shoes. Knight traveled to
Japan, Taiwan and Hong Kong looking for manufacturers to make athletic shoes for him.
He eventually succeeded in ordering 20,000 pairs of tennis, running, basketball,
wrestling and casual shoes.
Blue Ribbon walked a delicate line at this time. The company was still importing Tiger
shoes from Onitsuka Co. Ltd. while initial stocks of Nike shoes were being
manufactured. In fact, Onitsaku was once again talking about a possible U.S. joint
venture company, to be called Tiger Sporting Goods Inc.
As it turned out, Onitsaku heard about the new Nike shoes and cut off Blue Ribbon’s
supply of Tiger shoes well before sufficient supplies of Nike shoes were available. This
threw Blue Ribbon into a state of total and complete pandemonium. Quality, supply and
shipping were chaotic.
Knight scrambled to find another Japanese shoe manufacturer to take the place of
Onitsaku. He eventually ended up establishing a manufacturing agreement with Nippon
Rubber who agreed to make shoes according to Bowerman’s designs, to be sold as
Nike running shoes.
In 1972, with 8-years in business, Blue Ribbon was again starting from scratch. The
running boom was just about to take off, and they had no shoes to sell. Blue Ribbon did,
however, enjoy one incredible stroke of good fortune - Bill Bowerman was selected as
head coach for the U.S. Olympic Track and Field Team for the 1972 Olympics in Munich.
Equally significant, the olympic trials would be held on Blue Ribbon’s doorstep in
Oregon.
Bowerman also continued to develop numerous ideas for new running shoe designs.
For example, one day he sat at his kitchen table and looked at his wife’s waffle iron. He
wondered whether square spikes would be good for traction. He took some rubber
urethane and poured it into the waffle iron, but because he had failed to add the correct
material, the iron was bonded shut and
couldn’t be opened. Bowerman then made a plaster mold of his shoe sole idea. The first
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mold broke when he tried to pour rubber into it. The second mold melted, but on the
third try Bowerman finally made some new shoe soles. The only problem was that
instead of square spikes sticking out, he had made a sole with square holes sticking in.
Despite the mirth that surrounded his mistake, he had a runner try out shoes fitted with
the new sole and they proved to be very good. Nike’s famous waffle sole had just been
born.
Nike shoes were popular at the 1972 olympic trials because the company was promoted
at the grass roots. Blue Ribbon was perceived to be a company of athletes developing
shoes for other athletes. By contrast, Adidas and Puma were typically German ¬well
funded, very formal in their approach, and totally inflexible towards redesigning shoes
for the U.S. market.
Despite the supply problems, Blue Ribbon actually sold 250,000 pairs of Nike running
shoes and 50,000 pairs of basketball boots in 1972. The company recorded a loss of
$87,000, but the signs were promising that Blue Ribbon might actually make it.
(The only cloud on the Nike horizon at the time was a pending court case with Onitsaku
over the exclusive arrangement for Blue Ribbon to sell Tiger athletic shoes. When the
case finally came to court in 1974, the court ruled in favor of Blue Ribbon and dismissed
all of Onitsaku’s claims.)
By 1974, Blue Ribbon was starting to sell running shoes in rapidly increasing volumes
as the jogging trend caught on in the USA. Blue Ribbon recorded $4.8 million in sales
that year. The company still sold Japanese made shoes only, and Knight decided it
would be wise to create a manufacturing base in the United States.
Phil Knight and Jeff Johnson found an old shoe factory in Exeter, New England which
had been closed down. To begin manufacturing athletic shoes, they needed about
$250,000 in start-up costs. Since they were total novices at manufacturing, they realized
nobody would lend money to them. Therefore, they decided to finance the operation
through the Japanese trading company Nissho Iwai. The only tricky part was that
Nissho Iwai wasn’t going to know anything about it.
Blue Ribbon was growing so quickly that shoe deliveries to the retail stores bore little or
no resemblance to orders placed. At one stage, the company was surviving on creative
cash management alone - that is, finances were so tight that Blue Ribbon wrote
cheques to pay bills and then went out and beat the bushes to get enough money in to
cover the cheques before they were presented.
To develop accurate forecasts for future orders, Jim Moodhe (the new national sales
manager) suggested a futures program which offered major customers a 5- to 7-percent
discount for ordering shoes six months in advance. The program proved to be popular
with the retailers, and Nissho agreed to finance the future collectibles outside Blue
Ribbon’s normal credit line. Sales leapt ahead, growing to $8.3 million in 1975.
In spite of this impressive growth, Blue Ribbon was constantly in a cash squeeze. The
company’s bank eventually objected to those creative cash management practices. In
late 1974, Blue Ribbon’s bank froze all their accounts and threatened to close the
company down. The Bank almost laid charges of fraud against Blue Ribbon’s
management, until Nissho paid $600,000 to clear all letters of credit and other bank
loans.
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In late 1975, Blue Ribbon undertook a number of new projects. The company launched
its first professional basketball endorsement program. Basketball boots had accounted
for about $2 million in sales the previous year, and Blue Ribbon launched the Nike Pro
Club for professional basketballers. Blue Ribbon put 20 cents from the sale of each pair
of basketball boots into a pool, which was divided between the 10 members of the Nike
Pro Club at the end of the year. (In 1976, these players ended up receiving about
$10,000 each from the pool.) Knight also moved to set up an Asian manufacturing base
in Taiwan. He was aware that being dependent on Nippon Rubber in Japan for most of
his shoe supplies was dangerous. Even though Blue Ribbon had the small
manufacturing plant at Exeter, it didn’t have a very large capacity.
Knight traveled to Asia with one of his newer employees, Jim Gorman. They spent most
evenings with rather hospitable Japanese and Taiwanese hosts who plied them with
numerous drinks. At one stage, Gorman couldn’t drink any more so he started throwing
his drinks under the table right onto Knight’s pants leg.
Knight himself was so drunk he didn’t notice what Gorman was doing. However, back at
their hotel, Knight suddenly realized why his pants leg was drenched and started
slugging Gorman. In fact, in their drunken state, Knight accidentally knocked Gorman
down a flight of stairs. The next morning, Gorman went to Knight’s room and found him
sprawled on the floor searching through a pool of vomit for his contact lens.
Knight also moved to increase his control over Blue Ribbon Sports at around this time.
Bowerman sold most of his shares to Knight, who then sold shares to Jeff Johnson, Del
Hayes, Jim Modhe and the others who had been involved in the very early days. It was
also time for the debenture holders to nominate whether they wanted to convert their
loans into shares or be paid out. When all the negotiations had finished, Knight held
275,000 shares, the outside stockholders 185,000, key employees 57,500 and
Bowerman 17,500 shares.
Despite having achieved $14 million in sales in 1976, Blue Ribbon was still in a small
business operating mode. The company spent $310,000 on advertising and promotions
for the entire year. At the 1976 Montreal Olympics, Adidas spent $7 million promoting its
products. By contrast, Blue Ribbon gave away $5,626.90 worth of shoes to athletes.
By the end of 1976, orders for Nike shoes were growing at an impressive rate. Knight,
still with an eye on being totally independent of Japanese manufacturers, set up a high
volume manufacturing base in Korea. Jim Gorman was sent to Asia to oversee
production.
Knight worked hard to make Nissho feel like a partner in Blue Ribbon Sports. He issued
Nissho with 300,000 shares of a special class of preferred stock that paid a 10-percent
dividend but had restricted voting rights. That made Nissho feel like a stockholder
without actually giving them the power to do anything detrimental.
Knight also continued to negotiate with Nippon Rubber. He gave them the right to
manufacture and market Nike shoes in Japan in exchange for a non-competition
agreement prohibiting Nippon Rubber from manufacturing shoes for any of Nike’s
competitors.
Nike was now the biggest running shoe brand in the USA. But running shoes were only
a small portion of the athletic market. In 1977, Blue Ribbon had sales of $28 million,
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while Adidas sales were $500 million, with $100 million in the USA alone.
Importantly, Blue Ribbon Sports was still managed by the same close-knit group of
friends who had started the company. In fact, every six months, this inner circle
gathered for a boisterous and irreverent management meeting to discuss the operation
of the company. At one meeting, they started calling each other ‘‘buttface’’ as a joke,
and the name stuck. From then on, the Blue Ribbon Sports management meetings were
known as a gathering of the Buttfaces.
The original members of the Buttface group were Phil Knight, Jeff Johnson, Del Hayes,
Bob Woodell and Rob Strasser. Others were invited to attend as the company grew.
The Buttface meetings were never passive affairs - in fact, ideas were usually booed
loudly or cheered whole-heartedly. The Buttface meetings were notable for their sound
level. The decision making process followed by Blue Ribbon definitely rated as one of
corporate America’s most unusual.
Neil Goldschmidt later described one Buttface meeting he attended. At a midmorning
break, Knight had stood up and opened the doors to an adjoining suite which contained
two rented video games. from then on, the rest of the meeting had carried on around
managers who were jumping up for their turn to play on the games. Topics of
conversation moved from tax shelters to soccer matches and everything in between.
At one point, the meeting was discussing how to hedge currency risk on international
business transactions. The subject started with Hayes at the chalkboard and ended with
six people, all with chalk, all writing on the board, all talking to each other while nobody
else listened. The noise level in the room was so high it was amazing the hotel
management didn’t throw them out.
Meanwhile, play on the video machines continued unabated. At one stage, a middle
manager was making a presentation on a new $2 million computer system while his
boss was playing Pacman. When asked for his opinion on his employee’s proposal, Jim
Manns replied, ‘‘Oh, just buy the darn thing, and don’t bug me while I’m going for a
power pill.’’
The whole thing was Nike was run by a bunch of friends who were out to have a good
time, and to make some money while they were at it if they could. The Buttface
meetings accurately reflected that.
From 1977 to 1980, Nike went from a $28 million private brand to a $240 million public
company.
While Adidas shoes were generally better made than Nike shoes, Blue Ribbon started
to introduce new models that soon became the definitive running shoe. Nike introduced
innovations such as flared soles, waffle bottoms, heel counters, brightly colored nylon
uppers and increased padding to cushion the impact of running on roads.
Blue Ribbon rode the wave of popularity that engulfed the running movement. By the
late-1970s, almost half of the adult population of the United States had at least tried
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jogging. Even those who weren’t actively involved in jogging or running wanted to copy
the look of the serious athletes. Running shoes started to become acceptable footwear
in all types of social situations.
Blue Ribbon’s strategy at this time was simple- use endorsements to create and exploit
the mental edge that exists in every sport. They catered to the average consumer who
wanted to look just like his sports heroes.
One aspect of this strategy involved the creation of a running club called Athletics West.
The club was designed to cater for athletes who had finished their university educations
and needed good training facilities. It was largely modeled on athletic clubs in New
Zealand and Europe. Athletics West would later serve as the training ground for
numerous successful athletes including Mary Decker.
While other shoe companies such as Converse and Adidas fought over endorsement
rights by NBA basketball players, Blue Ribbon was the first shoe company to go after
the college basketball teams. They hired a promotions man to contact all the college
team coaches and offer them $2,000 cash and supplies of Nike shoes to use in
coaching clinics for high school kids.
Nike gradually moved into other sports such as baseball and football over the following
years. Generally speaking, each of these sports were serviced by just a single Blue
Ribbon employee who had a passion for the sport and a keen eye for an emerging
talent. The highlight of any of these promotional efforts was to get an athlete on the front
cover of Sports Illustrated wearing a Nike shoe. Whenever that happened, Phil Knight
and the rest of the team at Blue Ribbon were over the moon.
The atmosphere at Blue Ribbon was still very casual. The management dressed in
whatever they felt like, and acted more like a group of buddies out having a great time
than businessmen making decisions for a multi-million dollar corporation.
Practical jokes definitely took center stage in the company’s emotional make-up. On
one trip to Asia to speak with their shoe manufacturers, the Buttfaces took along Ron
Nelson. At a formal dinner in Manila, Nelson distinguished himself by drinking the water
from a finger bowl the waiter had bought around for the diners to clean their hands.
Things like that happened often whenever Blue Ribbon employees got together. The
company’s people were like that - laid back and amusing.
The greatest source of mirth around this time continued to come from the Buttfaces. For
one thing, they looked fairly comical. Knight and Johnson were lean runners, but Hayes
weighed about 140 kg and looked like he had never exercised once in his life. Bob
Woodell was confined to a wheelchair. Strasser weighed even more than Hayes - hardly
the profile expected of the general management of a fitness company.
In 1978, Blue Ribbon Sports officially changed its name to Nike Inc. Sales were
exploding in line with the incredible increase in the market for athletic shoes around the
world. For the 8-month period ended January 1978, Nike achieved $36 million in sales
and $11 million in gross profit.
Nike also created some legendary advertisements during this period. One of the more
famous showed a bare foot with a Nike shoe balanced on top, and a headline ‘‘Made
Famous by Word-of-Foot Advertising’’. Another showed a runner heading down a road
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stretching off into the distance, with the headline ‘‘There Is No Finish Line’’.
In 1978, a frustrated ski shoe inventor named Frank Rudy approached Phil Knight with a
great idea: what about using an air sole to cushion the impact of a running shoe. Knight
liked the idea when he went for a run on a prototype shoe that Rudy had developed, and
he drew up a development and licensing contract and put Rudy on retainer for six
months to develop the shoe.
The first prototype had the air sole inside the shoe, but that caused friction, generating
heat and blisters for the runner. It was clear that putting air into the midsole - the
cushioning material between the outsole and the upper - would be the answer. However,
doing that turned out to be quite hard.
The technical challenge was to find a material that would hold in place and stand up to
the pounding it would receive without being so stiff that it defeated the purpose of the air
bag in the first place. Eventually, the right type of material was found. In the production
version, the air bags were filled with a dense gas which didn’t seep out of the bag like air
did.
The first shoe with the Nike air sole, called the Tailwind, was released at the 1978
Honolulu Marathon. The shoes retailed at an all-time-high price of $50, but turned out to
be a disaster as the silver material used in the first batch of shoes tended to break down
and tear the uppers apart. About half the shoes in that first production run were returned
for a refund.
Nike also made a first tentative foray into the athletic clothing market with a range of
shorts, T-shirts, track suits and bags. Nobody took the effort too seriously at first
because the clothing looked just awful, and not even the most loyal Nike employee
would be seen dead wearing the stuff.
However, the introduction of air shoes and clothing paled into insignificance by
comparison with a letter which arrived at Nike in 1979 from the U.S. Customs
Department demanding payment of $27 million. It seemed that Customs had made a
slight miscalculation in assessing import duty the company was required to pay on its
shoes, and was fixing the problem retrospectively by charging increased duties on all
shoes which had ever been sold.
Nike was eventually able to convince the Customs Department to change the basis on
which the payment demand had been based to one that was more realistic from the
perspective of all athletic shoe manufacturers. This effort took a huge amount of political
clout to achieve, and it marked the first time that Nike had ever found out how the power
brokers in Washington operated.
The Customs back payment was reduced from $27 million to $16 million and later to $9
million. It took six years of behind the scenes discussions to achieve, but that was as
low as the Customs Department would go. Customs also agreed to change the whole
basis for calculating future payments to take into account Nike’s interests.
Nike sales revenues for 1979 were $150 million, with a pretax income of $19 million and
net income of $10 million. The company was starting to attract serious attention from the
financial community, much to the amusement of Knight and the Buttfaces. One
newspaper described Nike as operating ‘‘by the seat of its pants’’ and being a mixture of
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one-half Saturday Night Live and the other half Executive Suite.
Nike was in an unusual situation in 1980. The company didn’t own any of the Asian
factories that manufactured the bulk of its athletic shoes. Nor did it own the buildings
that served as the corporate headquarters. In fact, the only assets Nike owned were its
trademarks - the swoosh and the Nike name.
Finance for shoe manufacturing was still being provided by Nissho who were becoming
uncomfortable about the size of their financial commitment - which could exceed $100
million for the next year.
To keep Nissho on good terms, Knight and the Buttfaces decided to form a joint venture
company to manufacture and distribute Nike shoes in Japan. This new joint venture
would replace the existing agreement with Nippon Rubber, who weren’t doing enough to
push the Nike brand in Japan. Nissho agreed to the proposal.
While Nike was growing, the Buttfaces were having a lot of fun. They always went all out
to fire up their sales force at annual sales meetings. For the 1980 meeting, Strasser and
Peter Moore, a graphic artist, organized a huge multimedia presentation designed to
motivate the sales representatives.
To recreate the atmosphere of an American political convention, Moore had rented a
smoke machine operated by a hand pump. As Strasser read out each salesman’s name,
Moore was pumping furiously on the smoke machine. But, regardless of how hard he
pumped away, Strasser kept yelling, ‘‘More! More!’’
Before long, the smoke was so thick on the stage that Strasser couldn’t even read the
names from the cards he was holding right in front of his face. About then, Peter Moore
realized that instead of yelling ‘‘More!’’ for more smoke, Strasser had actually been
yelling ‘‘Moore!’’ to try to get him to stop the smoke.
Despite the fact that the air conditioning went out and the room was filled with smoke,
the meeting went well. In fact, so well that the reps started drinking tequila out of water
pitchers, and ended up generating the largest one-night bar bill in the history of the
company.
By 1980, pressure to take Nike public had grown stronger than ever. Nike now had $270
million in sales with a net income of $13 million, 2,300 employees and factories working
under contract in the USA, Taiwan and Korea.
At a meeting of the Buttfaces, Knight put forward the idea for discussion: ‘‘The best time
to get money is when you don’t need it. The market is strong right now, but if we wait
two or three years, we might have to give away a lot of the company without much
return.’’
There were the disadvantages of going public to consider. As a public company, a more
orthodox management structure, including formal titles and reporting structures, would
be required. The company would also be under a spotlight. The Buttfaces meeting
ended without any clear decision one way or another.
The early shareholders, who had invested in the company about ten years earlier in the
belief that Nike would go public in five years, demanded that Nike go public so they
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could reap the rewards of their investment. In fact, several of the minority shareholders
were actively considering forming a new corporation whose sole assets would be their
Nike shares, and taking that new corporation public.
In October 1980, Knight announced that Nike would go public. Two classes of shares
were created: 20 million Class A shares which were distributed to existing shareholders
and 30 million Class B shares which would be sold to the public. The Class A shares
had the right to elect 75-percent of the Board while the Class B shares elected
25-percent of the Board.
For the initial public offering, 2.3 million Nike shares were offered to the public - 1.3
million new Class B shares and 1.0 million Class A shares offered by existing Nike
shareholders. (Each existing shareholder had been granted 30 Class A shares for every
old Nike share they then held.)
Prior to the public offering, the directors and officers had owned 63-percent of Nike Inc.
By the completion of the offering, they would own 56-percent of the outstanding shares.
Phil Knight personally held 46-percent of the Class A shares.
The original shareholders who had invested in the early days of Nike did well out of the
public offering. For every dollar invested in 1972, they now held Nike shares with a
market value of $600. A $25,000 investment in 1972 was worth $15 million by 1980.
Nike Inc. listed on the New York Stock Exchange on 2 December 1980. The shares
opened at $22 per share, and bought in around $28 million for the company.
Phil Knight was suddenly worth $178 million, but more importantly he still retained
control of the company by virtue of the fact that he owned a majority of the Class A stock
which elected 75-percent of the Board.
The other members of the Buttface group were worth about $6 million each. There were
also a number of other long time Nike employees from the early days who assumed that
Phil Knight would naturally share some of his new found wealth with them. He didn’t.
Nike had started out as a brand name, been transformed into an athletic shoe by Knight
and the Buttfaces, and had finally turned out as an embodiment of the Great American
Dream.
By 1981, Nike was a public company with $458 million in revenues, 8,000 retailers, 140
shoe models, 130 sales reps, 2,700 employees and thousands of shareholders. Despite
all this apparent respectability, however, Nike still had a reputation as the Saturday
Night Live of the Fortune 500.
It was clear that money was changing the men and the company. The parties got wilder
and wilder, and the sales meetings so large and energetic that before long Nike
meetings were banned from the more respectable restaurants and convention centers
anywhere near the company’s offices.
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At one memorable sales meeting run by Rob Strasser, one of the Buttfaces, Nike
sponsored trips for coaches and players in a variety of sports started taking on mythical
proportions. Extravagance was also the underlying theme at the huge annual Nike Nite
for Retailers, with more than a thousand of the country’s largest retailers squeezing into
a private hotel banquet room to see and meet world-class athletes. Knight announced to
stock market analysts that Nike was positioning itself as a sporting goods company
creating the world’s most sophisticated technical footwear. In addition, Nike would
concentrate on increasing its international sales and apparel sales.
In February 1981, Knight called one of the Buttfaces, Rob Strasser, into his office and
assigned him the job of establishing a working base for Nike in Amsterdam, and to get
the company up and running over in Europe. When Strasser asked for specific
instructions on what was required, Knight told him, ‘‘Sell shoes.’’ He asked for more
specific instructions, only to be told, ‘‘Be a businessman.’’
Strasser found there were three ways to sell a product like Nike overseas. One was to
set up a Nike owned subsidiary, take the financial risk and build the brand. The second
was to use independent distributors who would buy the Nike product and resell it in their
own country. This lessened Nike’s risk, but also meant Nike had less control. The third
approach was to license out the Nike name and use of the trademark, allowing the
licensee to design, manufacture and market its own products under the Nike name. Nike
would have no risk and no control, but would earn a percentage of the sales as a
royalty.
In Europe, Strasser found an unworkable mixture of odd deals which had been patched
together while the company was growing in the United States. He decided that the best
approach would be to sell running as an image for Nike shoes.
By mid-1982, Nike Inc. was being pulled in a dozen different directions, and was
basically running on autopilot. The management style that had worked so effectively
when the company was the underdog up-and-comer now started to work against Nike.
Knight and the Buttfaces were each focusing on challenging areas of the business.
Decisions were being made at cross purposes, and new shoe lines were being
introduced which over-lapped and took sales away from existing Nike products. There
was also ongoing general confusion about Nike’s efforts to diversify, with apparel
remaining a jumbled line of odd products that didn’t make sense.
Knight decided to restructure Nike into Product Line Management units that gave
individual product managers responsibility for all decisions within that category, from
product to advertising and sales. The four product lines were: running, cleated, court
and emerging sports. Running was the flagship, with 34-percent of Nike’s total sales in
1982.
The only problem with implementing the Product Line Management approach was that
the men who had responsibility for each line didn’t actually have enough authority to get
the job completed. There simply weren’t enough people who Knight knew and trusted
enough to fill all the slots.
There was also another problem in that Nike had one brand for all products in every
market, as opposed to other consumer product companies who create different brand
names for different products.
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Nike made a secondary public offering in October 1982 which raised a further $51
million. However, the signs were ominous that the running boom had peaked and that
Nike wasn’t, after all, recession proof. For the first time in the company’s history,
revenues were flat at the previous year’s levels - there was no growth.
Nike quickly did away with the Product Line Management approach and instead
returned to the old days of assigning various members of the Buttface group to key
company roles. The company was in a serious position now. For example, Nike had an
inventory of 20 million shoes to sell - one for every 20 people in America and a huge
$280 million item on Nike’s balance sheet.
In February 1983, Nike reported its first quarterly decline in history. Nike B shares
dropped from $23 to $16 a share.
Nike also had another problem which came to take on ever larger proportions at about
this time - competitors. Reebok, a British shoe, rode to prominence on the strength of
the aerobics fad in just the same way as Nike had grown large by becoming identified
with running. Before Nike could react, Reebok had grown to have a huge multi-million
dollar turnover in the United States.
In 1983, Nike was a $900 million company in a state of paralysis and crisis. The
company had grown so quickly and so steadily that past problems had always been
overcome by the personalities of Knight and the Buttfaces. Now they were all stretched
so thin that the company roared along like an out of control train.
Knight decided there were two major issues to face immediately: to rejuvenate the
brand and to cut back expenses. He realized that marketing was the key. The 1984
Olympic Games to be held in Los Angeles were a major marketing opportunity. The only
problem was that Converse had paid $5 million to be the ‘‘official shoe’’ of the games.
To overcome this, Nike developed commercials for Los Angeles which featured all of
Nike’s highest profile athletes. They also decided to paint huge murals on the side of
high rise buildings which featured famous athletes and a tiny Nike logo. The ad
campaign was a tremendous success.
Still, despite this, Nike shares continued to take a hammering on the New York Stock
Exchange. In fact, Nike B stock dropped all the way to $9.75 a share.
Just when things looked bleak for Nike, the promotions department pulled off a major
coup which ended up being the turning point for the better. Nike outbid Adidas and
Converse to sign an endorsement contract with a rookie NBA basketball player, Michael
Jordan.
Actually, the endorsement contract involved more than just paying Jordan to wear Nike
shoes. Nike agreed to create an entire line of basketball boots - the Air Jordans. The
contract allowed for Jordan to receive an annuity, a signing bonus and a guaranteed
share of the profits from Air Jordan shoe sales. The contract was worth $2.5 million over
five years.
The Michael Jordan contract signing came just in time to deflect shareholder gloom at
Nike’s 1984 Annual General Meeting. the shares were now trading at $9 per share. Nike
had announced a 65-percent decline in earnings, its worst on record. However, the
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decline continued and by the end of 1984, Nike B shares stood at $6.60, and the
November quarter showed a loss of $2.2 million.
The Michael Jordan contract turned out to be the most successful athletic endorsement
in commercial history. More than $100 million of Air Jordan basketball boots were sold
in 1985, setting off one of the largest product frenzies in the history of professional sport.
Michael Jordan and the Air Jordan line literally turned around the fortunes of Nike Inc.
Nike was still in an intense marketing battle with Reebok. By concentrating on aerobics,
Reebok sales in the United States had grown from $3 million in 1982 to $65 million in
1984 and $307 million in 1985.
At the beginning of 1985, Nike had a 28-percent market share, Reebok 13-percent,
Converse 8-percent and Adidas 8-percent. By the end of that year, however, Reebok
had risen to a 30-percent market share while Nike cornered 21-percent of the overall
market. Reebok had made it to the top by being more responsive to the needs of the
customers, particularly females.
Nike B shares made a steady gain to $15.75 each in 1985. It finally looked like 1986
would be the year that Nike would push through the mythical $1 billion in sales level.
The Air Jordan product line was a star, but Nike still needed more.
Nike was also going through the throes of a changing of the guard around this time.
Many of the original employees who had been attracted to the company by a casual
atmosphere and a fight against an entrenched German competitor found themselves at
odds with the way Nike was evolving. professional employees who were career minded
(and even worse, who dared wear suits to the office!) were joining Nike. The company’s
character was changing.
Nike still needed another product to promote alongside the Air Jordan line. In 1985, a
project resurfaced which had been in the pipeline for the last six years - a visible air bag
or see through running shoe shoe sole which had a built in air bag to cushion running
impact. This product later came to be known as Nike Air.
At the same time, Nike also developed the first cross-training shoe. The idea was simple
- take a running shoe that was designed for short distances and add support materials
so the wearer could also use it to play basketball and work out in the gym. The third
product developed at this time was called Maximum Air. It was a long distance running
shoe with as large an air bag as possible built into the sole. The three new shoes would
be launched together as the Nike Air range.
Luckily for Nike, an athlete came along at precisely the right time to promote the cross
training shoe concept. Bo Jackson, an exceptional athlete who played professional
baseball and football, become Nike’s athletic endorsement for cross training shoes in
general and the Nike Air range in particular. Within a few years, cross-training would
grow to be a billion-dollar per year category for athletic shoe manufacturers.
By 1987, the Nike Air range would completely turn Nike around. That year saw the
highest quarterly income performances in the company’s history. Nike B shares were at
a three year high as Nike regained the number one position in market share.
The Air Jordan promotion continued to be a huge success. In 1989, Nike renegotiated a
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contract to ensure that Michael Jordan would continue to wear Nike shoes for the rest of
his professional basketball career. Jordan received a payment of $20 million under this
contract.
Nike has now completed its transition from an Animal House and Saturday Night Live
type of shoe company into a conservative, professionally managed company with an
annual turnover of $3 billion. The company continues to bring out strong products
backed by an effective marketing and promotion system.
Nike has tripled its sales turnover since 1987. The company is now managed by
professional managers rather than the characters like the Buttfaces. Phil Knight is a
billionaire, and the company he created continues to roll forward.
* * *
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