Nike Knight the king case study : Q1. Evaluate Knights decisions in the early days of Nike (good and bad).

a. Evaluate his career and business decisions.

Q2. Jeff Johnson was a crucial early employee who asked Knight for equity and was refused. Why couldnt Knight give 2% to Johnson?

Knight the King: The Founding of Nike It had taken Phil Knight 16 long years to build Nike into the number one athletic-shoe company in the country. When Knight had first conceived of the company for an MBA class project, Adidas had more than an 80% market share, but Knight's marketing approach had revolutionized the industry, his company had developed several ground- breaking shoe technologies, and Nike's brand had become one of the most recognizable in the world.1 In 1980, the same year that Nike had knocked Adidas off its throne, Nike had gone public and Knight, its founder-CEO, still owned close to half of the company. However, now, barely half a decade later, Knight had just received the news that Nike itself had been dethroned by Reebok, an upstart competitor. Knight closeted himself in his office, faced the wall, and sat there, weak, sick, and devastated for hours. Shaped by Coach Bowerman The son of a newspaper publisher who was also an Oregon state politician, Phillip Hampson Knight was born in 1938 in an affluent suburb of Portland, Oregon. Knight made a name for himself on his high school track team as one of the city's best middle- distance runners. After graduating, he went to the University of Oregon (UO) in Eugene and joined his cross-town rival in the mile race, Jim Grelle, on Coach Bill Bowerman's track team. Bowerman was building the UO track team into a powerhouse of milers, and Grelle quickly gained notoriety as a potential Olympian. Throughout his amateur athletic career, Knight was always number two behind Grelle. Bowerman demanded the best from his athletes. One time, he scheduled a mile time trial on a day when Knight felt a terrible, achy flu coming on. Knight asked Bowerman to be excused. "Phil, who would you say is the coach of this track team?" Bowerman asked. "You are," Knight replied. "Well then, you go in fifteen minutes. Knight hit the track and ran a personal-best 4:13 mile. Bowerman clicked the watch, noted the time, and observed, "You don't look sick to me."5 Knight recalled the story years later: "If you ask where Nike came from, I would say it came from a kid who had the world-class shock administered at age seventeen by Bill Bowerman. Not simply the shock, but the way to respond. He attached such honor to not giving up, to doing my utmost. Most kids didn't have that adjustment of standards, that introduction to reality." Bowerman had a mold in mind that he called "The Men of Oregon," formed by his own experience as a standout football player at VO and as a soldier in the European theater during World War II. Preaching discipline and goal-oriented focus, Bowerman imprinted his lessons on athletes by subtly crafting a culture of excellence. He prepared his men extensively, but they had to execute 1 when the time came. Bowerman had a well-known pre-meet speech: "Only one of you will win your event this week. What does that make the rest of you? Losers? Third place is one point, and that could make the difference between winning and losing as a team. I will tell you right now that you have a far better chance in life winning as part of a team than you ever will as an individual."9 Bowerman took a deep interest in the shoes worn by his runners. He ordered a pair of Adidas from Germany--which were not available in the U.S.--and set out to re-create the shoe out of lightweight, thin polymers. He cut open those shoes along with dozens of others in order to learn more about their anatomy.10 Bowerman experimented with a variety of materials, coming out with a new shoe virtually every week. He made ultralightweight, custom-fit shoes exclusively for his athletes. The psychological effect of Bowerman's efforts was to make his athletes feel they had a distinct advantage over competitors because of their "magic" shoes. 11 The first Oregon runner for whom Bowerman made a pair of competition shoes was Phil Knight in 1958.12 The Birth of Blue Ribbon Sports Knight graduated from UO in 1959 and, after a stint in the Army Reserves, went to Stanford Graduate School of Business to study accounting. He enrolled in a small business management class in which the principal assignment was to imagine a brand-new business, describe its purpose, and create a marketing plan to make it competitive 13 He learned that 25 out of 26 businesses fail, but while listening to his professor lecture about the type of person suited to be an entrepreneur, he thought he recognized hints of himself.14 Even so, he drew a blank when it came to an idea for the class assignment.15 Pondering the question in his room, he looked at a new box of Adidas, resented how much they had cost him, and it hit him. The title and focus of his class assignment became: "Can Japanese sports shoes do to German sports shoes what Japanese cameras have done to German cameras?"16 Adidas, which were made in Germany, were the gold standard of athletic shoes, but they were expensive and hard to find in the U.S. Knight figured that with inexpensive Japanese labor, an American distributor could sell track shoes that could compete with Adidas in quality but undercut them in price. In his class paper, Knight envisioned a small- scale operation that would sell imported Japanese track shoes in the Pacific states of California, Oregon, and Washington. 17 Graduating from Stanford in 1962, Knight promised his father that he would take a job with a Portland accounting firm.18 But first he sold his car, borrowed some money from his parents, and took a tour of Japan. Knight travelled extensively throughout the country and became enchanted with the simple, austere aesthetic of Japanese culture. 19 Along the way, he visited local sporting goods stores and-armed with a rudimentary knowledge of shoe design from his years of listening to Bowerman-concluded that the best hope for U.S. exports lay with the Onitsuka Company and their "Tiger" brand.20 When he learned that the Onitsuka headquarters was in Kobe, a seaport near Osaka, he decided to make a cold call. Kihachiro Onitsuka, the founder of Onitsuka Co., Ltd., ran a manufacturing operation that covered the gamut of consumer goods. By 1962. Onitsuka was manufacturing 66 models of athletic shoes with $8 million (U.S.) in sales worldwide.21 On the train down to Kobe, Knight saw bottles of beer arrayed above the bar in the beverage car, and noticed one brand named "Suntory Blue Ribbon."22 When he reached the Onitsuka plant, he introduced himself to half a dozen assembled executives as an American importer who was starting a new track shoe distributorship. They asked, "What might be the name of your company?"23 Knight did not hesitate. "Blue Ribbon Sports of Portland, Oregon," he said. "Sorry, I'm all out of cards. "24 After the meeting, he wrote his father a long letter asking to borrow $37 to order some samples of the Onitsuka Tiger shoes. 2 Knight returned to Oregon in early 1963 and moved in with his parents, taking a job at a Portland accounting firm that later became PricewaterhouseCoopers. As he waited for his samples to arrive, he contacted Dick Miller, his best friend from the Oregon team, and recounted the story of Onitsuka "Look at these things. They're called Tigers," he said. "I faked out the company. I'm the U.S. distributor. Come in with me."25 Miller saw that Knight was serious about the company, but was hesitant to buy in. "How much will it take?" he asked. "Six hundred dollars each. Twelve hundred total investment," Knight replied.26 In the end, Miller decided not to join his friend and teammate; he was a newlywed and had to plan for a family. When the Tiger samples cleared customs in early 1964, Knight sent Bowerman two pairs. "These are the hot new shoes coming out of Japan," he wrote. "The spike (shoe) weighs just less than six ounces, which compares favorably with Adidas. If you feel the shoes are of reasonable quality, you could probably save a little money since I wouldn't make a profit on shoes I sold to you. Costs, I think, $4.50 on the flat [training shoe) and $7 on the spike [competition shoe]."27 Bowerman had attempted at various times to manufacture or distribute foreign track shoes in addition to his efforts at shoe design, but his main focus was on training runners and building a national-championship-winning UO track team 28 Now he had an opportunity to get involved in the shoe business without compromising his role as a coach. Bowerman wrote a reply to his young protg: "I like the looks of your Tiger shoe. I've heard of these, but have never been able to get hold of a pair. If you can set up some kind of contractual agreement with these people, for goodness sakes, do it! I'll pass on some of my ideas to you, but, of course, I'll expect you to make some kind of an arrangement with cutting your old coach in, too." 29 After an hour-long meeting, the two came to an agreement: Knight would run and own 51% of the company while Bowerman would own the remaining 49%. With a $500 investment cach, they signed an agreement and became jointly and severally liable for the new company, Blue Ribbon Sports (BRS).30 (See Exhibit 1 for key Nike milestones.) Knight opened a line of credit for the small business and ordered 300 pairs of Tiger shoes from Onitsuka in 1964.31 Assembling a Team BRS had one defining characteristic in the early days: the presence of middle-distance runners, many of them former "Men of Oregon," in key positions throughout the organization. Middle- distance events like the mile-require both speed and endurance. Milers need to have the mental agility to decide when to sprint and when to maintain a controlled pace to save energy. Jeff Johnson, BRS's first employee, had been a middle-distance runner since age 12 who saw running as his life's passion.32 Knight and Johnson first met at an intramural track meet at Stanford in 1962, when Knight made a push in the final lap to finish one second ahead of Johnson in the mile race. Johnson had a liberal arts background, but quit graduate school halfway through completing his degree in anthropology in 1963. He was now working full time as a social worker, but he continued to focus on running by photographing track meets and writing short articles for national track and field magazines. In the summer of 1964, the two ran into each other again at a track meet in California. Knight had travelled to the meet to sell Tigers, and eagerly showed Johnson the shoes. Looking for help, Knight asked Johnson if he wanted to sell Tigers in Northern California. Johnson agreed to help Knight for a commission of $2/pair. On his first day, Johnson headed out to a San Fernando Valley road race and netted 13 orders.33 Knight, who was still working full-time as an accountant, had little time to offer guidance; so Johnson built a customer mailing list, created BRS stationery, took out a small-business license, and ran mail- order ads in track magazines with wide circulation.34 However, Knight had spent a great deal of time touring regional track meets and selling shoes to the competing athletes out of the trunk 3 of his green Plymouth Valiant. Johnson followed suit, focusing on approaching, building relationships with, and outfitting track and field athletes who he thought showed promise,35 Relentlessly touring the Pacific Coast to network with runners and coaches, he succeeded in getting shoes on a National Collegiate Athletic Association (NCAA) cross-country champion, an Amateur Athletic Union (AAU)a marathon champion, and four of the top five men in the Boston Marathon by 1965.36 By the end of the year, BRS had sold more than $20,000 worth of shoes. 37 During this era, consistent with his own temperament and reinforced by what he had learned about failure rates, Knight was very careful about every dollar spent, although his attitude toward BRS was that if the business failed, he'd just start another one. In 1966, Johnson learned of a high school wrestling coach in New York who was selling Tiger track shoes. The coach had been importing Tiger wrestling shoes since 1959, and had recently added track shoes to his orders. In response, Knight went to Japan in November and signed a three-year exclusive contract to distribute Tiger track shoes in the U.S. When Knight returned to Oregon, he sent the wrestling coach a series of letters threatening to take him to court. Hesitant to engage in litigation, the coach relented and BRS became the sole distributor of Tigers. In a 1990 interview, the wrestling coach concluded that Knight had had a bigger vision" than himself. Meanwhile, Johnson had sold so many shoes that Knight owed him $736. Johnson suggested that he become BRS's first salaried employee. Knight acquiesced, and also agreed to open a retail store, another one of Johnson's suggestions. Throughout 1966, Johnson managed the retail store, ran a national mail-order business, wrote ad copy, did promotional work at track meets, and acted as his own shipping clerk. Johnson hired his first employee a high school student who worked part time at the new store-once BRS reached $40,000 in sales later that year. In 1967, encouraged by his father, Johnson wrote a letter to Knight: "I think I have been directly responsible for what success we have had so far. You have three alternatives as regards me, (a) make me a partner by letting me buy Bowerman out with my father putting up the money: (b) raise my salary to $600 a month and one-third of profits on volume sold above 6,000 pairs; or (c) fire me by August 1.541 Knight flew to Palo Alto to meet with Johnson, and rejected his demands; Bowerman didn't want to sell, he said, and if Knight were to sell off a portion of his own 51%, he would lose control of the company. Instead, Knight proposed to send Johnson to establish a presence on the East Coast. Johnson settled for a $50 raise, and hit the road, heading east. He entered the Boston city limits two weeks later and found a place where he could live and work in Natick, Massachusetts splitting the rent with Knight. Johnson would go on to build a substantial presence in Boston during the coming years by touring northeastern track events and filling orders from his new office.42 Meanwhile, Knight began to hire other former runners to staff the store in Santa Monica.43 Throughout the 1960s, Bowerman worked closely with the Onitsuka factory designing prototypes and testing them on the UO track team. Tweaking each other's innovations from locations across the country, Bowerman and Johnson designed the Tiger Cortez shoe that featured a wider heel and cushioned midsole 44 This model became the signature product of BRS. In the fall of 1967, Knight left his accounting job and started teaching a business administration class part time at Portland State University. BRS's sales had practically doubled annually, and in 1969 total sales exceeded $400.000. The BRS stores were staffed by former runners with little business expertise inventory counts rarely totaled correctly; and company expenses were put on personal cards. Coordination was difficult and spotty, with stores in Portland, Los Angeles, Eugene, Boston, and for a short while Florida failing to match orders and selling whatever they were sent. Bowerman continued to focus on coaching track and designing shoes, but he spoke with Knight about the chaotic nature of their company's business operations. Thinking of possible resources, Bowerman focused on Bob Woodell, a former sprinter and a jumper on the UO track team.47 Although a star in high school, Woodell had only been an average jumper in college. Before his senior season in 1966, Woodell had suffered a paralyzing injury. Bowerman visited Woodell in the hospital often, and witnessed Woodellis tenacity and positive attitude during the recovery process. Bowerman also knew that Woodell was bright, and thought he would make a capable business manager, so he called Knight. Based on Bowerman's recommendation, Knight hired Woodell as the manager of the Eugene retail store. In 1969, Knight finally became a full-time employee of his five-year-old company. He centralized operations in Portland and named himself CEO. Bitten by a Tiger Despite Woodell's lack of experience, he was put in charge of BRS's bookkeeping and operations. This freed Knight to think more strategically. In December 1969. Knight flew to Japan to meet with Kihachiro Onitsuka. He complained that Tiger shipments were perpetually late or mismatched. Onitsuka assured him that he was addressing the problem by increasing his capital expenditures dramatically and by hiring a new business manager, Shoji Kitami:50 Knight negotiated another three-year contract that gave BRS the exclusive right to market Tigers in the U.S. in return for selling only Onitsuka Tigers in his stores. The contract would expire at the end of 1972 Knight now had a steady supply of shoes, but needed the cash to purchase them. Dependent on short-term financing. BRS was stuck in what Knight called a "reverse-leverage position, forced to pay letters of credit on huge orders before he actually sold the shoes. Knight could have chosen to grow at a slower pace, but he had set his sights on overcoming Adidas and dominating the American market, Knight wanted his team to finish first. A magazine article inspired him to research Japanese organizations called sogo shosha, multifaceted trading companies that acted as international sales agents. With razor-thin profit margins, these companies made their money on massive turnover of exports to a variety of markets. One of the largest trading companies, Nissho lwai, had a Portland office and Knight sought a meeting with the company. Soon, Nissho Iwai offered to finance shipments of $350,000 worth of Tiger shoes for a 2% commission. Knight's other attempts to solve BRS's financial problems were less successful. For instance, he crafted a plan to offer 30% of his company to the public in May 1970, marketing the company as "Sports-Tek, Inc." For the first time, he proposed to offer key employees a chance to buy stock in the company they helped build. But the market was not receptive and Knight aborted the offering. 54 Afterwards, he called his long-time boss and mentor at PriceWaterhouse, Del Hayes, to ask for advice. Hayes agreed to work part time as a consultant for BRS. First, he facilitated an agreement with the Bank of California to expand BRS's line of credit. Then, he turned his attention to the question of how to raise equity capital so BRS could continue to grow. Wary of utilizing another IPO, and skeptical of venture capitalists who took big chunks of young companies low on cash, Hayes was attracted to the idea of a private offering. He settled on the figure of S200,000. Working through a network of former UO athletes and prominent Portland families, Hayes raised the money and by the end of 1971, the new investors owned 35% of the company, The capital gave Knight some financial breathing room, but Knight would soon run up against another hurdle. In the fall of 1970, he received a call from an East Coast sporting-goods distributor 5 who was planning a visit to Japan to meet with Kitami to discuss selling Tiger track shoes in the United States. He wanted Knight's advice. Knight was shocked that Onitsuka Co. would negotiate with another distributor just nine months after signing a three-year contract with BRS. In March 1971, Kitami flew to Portland for a week of meetings with Knight and BRS. Kitami announced that he was embarking on a national tour of distributors and argued that BRS was incapable of meeting the huge market demand. Weeks later, Kitami returned from his tour with an ultimatum: He had contracts waiting to be signed and BRS would have to give up rights to New York and California, among other territories, to distributors across the country. Knight protested that this was a violation of their contract, so Kitami proposed a takeover in which Onitsuka would get 51% of BRS's stock. Knight left things open- ended with Kitami and took the issue to Bowerman Knight saw several choices: (a) He could negotiate a management contract for the proposed joint venture a well-structured contract could offer financial security for his young family and a raise in salary: (b) he could simply look for a new manufacturer's line and continue as a distributor of someone else's shoes; (c) he could fly to Kobe and talk to Onitsuka himself. Onitsuka's founder had always been agreeable in negotiations, and Knight might be able to negotiate a fifty- fifty split or even get Onitsuka to back down entirely; or (d) he could make his own shoes 57 Bowerman encouraged Knight to create a new trademark that no one could threaten to take away. But, for this to work, Knight would have to stall any conversation with Onitsuka about the future. The Winged Goddess of Victory Johnson was demoralized when he first learned of the conflict with Onitsuka.59 However, Knight described the opportunity that he saw in this setback: Onitsuka was still too slow to react to their product development ideas, and had a poor record of sending shipments on time and with the proper contents. Knight felt that the U.S. market was ripe for the taking, with Onitsuka concentrating on Japan, Adidas on Germany, and American shoe companies on making leisure products. BRS already had relationships with elite athletes and a proven marketing strategy. Knight felt that they could beat Adidas at their own game in the U.S. Knight flew to Tokyo to finalize an agreement with Nissho lwai for $650,000 worth of credit for an independent line of BRS shoes. Despite BRS's small size, Nissho lwai got Knight a meeting with the Nippon Rubber Factory, a giant, state-of-the-art manufacturing plant in Japan. Ten thousand pairs of shoes was the minimum order that Nippon demanded, so Knight placed an order for exactly 10,000 pairs, of which 6,000 pairs were copies of the Cortez racing flats while the remainder were a combination of basketball, tennis, and casual shoes. Although BRS would now have a shipment of shoes, it did not yet have a name or logo for its product line. In 1971, Johnson visited Oregon for the first time since moving East, to meet with Knight and Woodell. They wanted to create a new, eye-catching logo for their brand to compete with the Tiger shoes. The men sifted through designs that they had commissioned from a Portland State art student for a one-time payment of S35. They kept coming back to a fat, fleshy checkmark she had designed, which later became known as the Swoosh." Not entirely enthusiastic about their decision, but unable to find anything better, they agreed to make it the new logo. Johnson returned to Massachusetts. He soon received a call from Woodell. "We need a name by 9 a.m. tomorrow," he said.63 The factory was making the boxes for their new shoes and the only branding they had was the Swoosh image. That night, while Johnson slept, he thought of a magazine article he had read about brand names, Kodak, Coke, Zippo, Clorox, Xerox, Kleenex -- they were all short and contained "exotic" sounds like a "K" or "X" When he awoke, his liberal-arts education 6 presented him with a similar possibility. He called Woodell at 7 a.m. shouting. "I've got it! Nike!" "What's a Nike?" Woodell asked. "It's the winged goddess of victory in Greek mythology. It's got a catchy consonant!"65 Woodell took Johnson's suggestion to Knight, who had been partial to the name "Dimension Six." Knight ruminated on the subject and finally decided with no input from anybody elseon Nike."After working for years to establish the Tiger name in the U.S., Knight and his team now had to compete against Tiger for marketplace share. Nippon finished the shoes, many of them based on the prototypes used by Onitsuka, and slapped the new Nike logo on the side. Knight changed the name of all seven of their retail stores, which for years had been associated with Tiger shoes, to "The Athletic Department." As soon as they sold their first pair of "Nike" Cortez shoes, they would be violating BRS's exclusive agreement to sell only Onitsuka Tigers. But Johnson went ahead and marketed them as "a parallel development to our Tiger line." When Kitami caught word of this new development in 1972, he headed to Portland to meet with Knight. Knight told Kitami that Nike was a hedge in case the Tiger contract was taken away from BRS. But during a surprise drop-in meeting at the Los Angeles retail store, Kitami found evidence of Knight's betrayal in the form of the Nike Cortez shoes in the back storeroom. Upon Kitami's return to Japan, Knight began hearing rumors about other specific distributors Kitami had contacted. Soon after, Kitami sat down with Knight and Bowerman for a series of jarring meetings. Kitami said he was sorry that Knight had breached their contract, and proceeded to terminate their agreement. Kitami did want to retain a relationship with Bowerman for R&D purposes, but Bowerman immediately refused. Knight ended the meeting with a parting shot: "See you in U.S. court!" The Waffle Sole and Bill Bowerman's Buyout One day in 1972, Bowerman was spending a Sunday morning alone while his wife was at church. Sitting at the kitchen table, he was absent-mindedly staring at the old waffle iron. He suddenly saw a pattern for square spikes, which could enable a shoe to provide traction to cross-country runners on dirt trails, or football players on Astroturf. Experimenting by pouring urethane into his wife's waffle iron (and thus ruining it in the process). Bowerman developed the first "waffle sole." For the next couple of years, he used waffle soles on the shoes of his runners, with much success. That same year, Bowerman was selected to coach the U.S. Olympic Track and Field team at the Summer Games in Munich. However, his enthusiasm for coaching waned after an unsuccessful effort at the Summer Games. None of the five competing UO athletes won a medal, and the murder of 11 Israeli athletes in the Olympic Village horrified him. Moreover, BRS had been the victim of an onslaught of marketing and promotions by the German company Adidas, which had outfitted 1.164 out of the 1.490 international athletes that year. Mentally exhausted, Bowerman retired as head coach of the UO Track and Field team in 1973 While Bowerman was ending his illustrious coaching career, Knight and Johnson were just beginning to build their new brand. They flew to the Nippon Rubber Factory and worked with the facility to create dozens of new design blueprints. When they returned to Oregon, they had improved on the old models, added a new line of specialized track shoes, and added six models of tennis shoes, including the company's first shoe for women. Nike began receiving so many orders that Knight had to hire a credit manager, James Moodhe. Moodhe was a graduate of Portland State University and was Nike's first employee without a significant running background. With Moodhe keeping the company's cash flow steady, the ability to secure enough volume to meet demand became less of a 7 problem. By the end of 1972, the first year of the Nike brand, 250,000 running shoes and 50,000 pairs of basketball shoes had been sold, and sales had increased by 60%. In March 1973, Knight filed a lawsuit against Onitsuka for breach of contract and Onitsuka countersued for trademark infringement. The case would be a close call: Bowerman had designed the Tiger Cortez (now being sold in the market alongside the Nike Cortez), but he had made it out of preexisting pieces of Tiger shoes, only adding a cushioned midsole. Kitami had gone behind Knight's back to negotiate with other distributors, but signed a deal only after Knight had breached their contract by selling another brand. In carly 1974, a judge ruled that BRS could retain the copyright to the names of the products that Knight had registered, forcing Onitsuka to change the name of Tiger's Cortez shoes and to compensate Knight for those sales. Onitsuka retained all of Bowerman's innovations, which BRS could also use, with one exception: Bowerman's "waffle sole" was the exclusive intellectual property of BRS and could be marketed only under the Nike name. In 1974 BRS launched Bowerman's new "Waffle Trainer" shoe, which quickly became the best- Selling training shoe in the country.80 With BRS's limited credit line. Moodhe, now national sales manager, was unable to order enough shoes to satisfy demand. In response, he developed the idea to offer major customers (such as large retail chains) the opportunity to commit to noncancellable orders months in advance. In exchange, customers received a 5%-7% discount with guaranteed on-time delivery for 90% of their orders. Such a guarantee would have been impossible with Onitsuka's inconsistent supply, but because of the new agreement with Nippon, Knight could confidently implement this "Futures" program. Moreover, Nissho agreed to finance these orders outside of BRS's preexisting credit line, enabling the company to shift the risk of huge orders to the retailers. This solved some of Nike's financial problems and became a powerful forecasting tool for the company, In 1975, while Knight was away on a trip to investigate potential foreign suppliers to supplement Nippon, BRS received a letter from the Portland Small Business Administration asking the co- founders to personally guarantee a loan. When Bowerman realized this meant he could lose his home, he told Knight he wanted to sell nine-tenths of his shares. The new arrangement would free Bowerman from signing the guarantee, while still giving him a continuing interest in the company. Knight gathered Johnson, Woodell, Moodhe, and Hayes to tell them about the change. "Because we are a team," he said, "I won't try and say who had been more important than whom, so I am going to offer cach one of you the same amount: 20,000 shares. "However, after thinking about it further, Knight decided on a different course of action. To regain majority control of the company, Knight announced at a shareholders' meeting that it had been Bowerman's intent to sell his stock to Knight Knight would then sell 10,000 shares half the original amount to each of the four top managers. The agreements were terminable when each man's employment ended, and Knight, the chief executive, could fire them at any time. The Race for Number One As the 1976 Olympic Games approached, BRS was again confronted with the Adidas powerhouse, which had 83% market share at the time. But the Nike team did have a few advantages in the American market. Bowerman had developed UO's track, Hayward Field, into the top facility in the country and the home of the Olympic time trial qualifiers. Meanwhile, the company's retail store in Eugene had become a hangout for runners where track and field athletes from across the country could come to meet some of their own kind, Geoff Hollister, another former Oregon Duck miler, ran the store and became friends with many of the athletes who would compete at the qualifiers. What Hollister lacked in financial resources, he made up for by offering the comforts of his home (which 8 became known as the "Hollister Hilton") to road-weary athletes and by providing close attention to every detail of his athletes' shoes. In 1976, Hollister was charged with leading Nike's promotional offensive at the Olympic Games. Adidas had a giant staff to cover all their sports, they dressed in suits and carried briefcases. Hollister would recall: "In the world of 'shamateurism,' we knew what was in the briefcases-cash for payoffs to athletes. We couldn't compete against this. We wouldn't try"Instead, Hollister focused on building relationships with promising athletes and maintaining a culture within the promotional team that supported and appealed to elite competitors. But this strategy proved to be demanding and unreliable. During the 1976 games, Hollister sought to convince marathoner Frank Shorter to wear Nike spikes for the Olympic marathon (Shorter had won a gold medal in the 1972 Olympics in Onitsuka Tigers from BRS, and had qualified for the 1976 Olympics in Nike racing flats.) Throughout his training for the 1976 Olympic Games, Hollister met with Shorter every day to discuss his shoes and made specific alterations to Shorter's shoes based on the athlete's feedback. However, on the day of the race, Hollister was shocked to see Shorter come in first wearing Onitsuka Tiger shoes Nike had been beaten by the brand they had worked for a decade to build. However, over the following years, Nike won battles for the feet of individual athletes. Phil Knight was increasingly drawn to tennis and signed star competitor John McEnroe for $25,000.89 Knight's strategy was based on a simple premise: when consumers saw Nike shoes on the feet of competitors they admired, demand for the shoes grew. (See Exhibit 2 for a depiction of Nike's Market Pyramid.") In the coming years, Nike shoes were promoted by such athletes as basketball stars Moses Malone and George "The Iceman" Gervin, tennis bad boy Ilie Nastase, and a stable of world-class track and field athletes such as Henry Rono and Sebastian Coe. Knight developed a plethora of innovative incentives to attract athletes. For instance, for the basketball players, Nike created the "Nike Pro Club": NBA athletes who wore Nikes would get a percentage of royalties instead of a flat fee, with a guaranteed $2,000 minimum. At the end of the first year in 1976. Pro Club members made $8,000 each.90 For runners, Nike created ** Athletics West," a track club where amateurs could be sponsored to compete in events all over the world. Crisis of Control Throughout the 1970s, the company held top management meetings twice a year. Raucous shouting matches and arguments characterized these meetings, but Knight and his men were familiar with one another and good natured enough to take it in stride. The usual attendees were Knight, Johnson, Woodell, Hayes, and Rob Strasser and Ron Nelson, two other key managers (Moodhe, formerly seen as a key member of the top management team, had grown isolated and was often left out of Knight's inner circle: the other men felt that he did less work than they did.) At one early meeting, Johnson sat back and watched everybody engage in a particularly boisterous session of name calling. He scribbled on a piece of paper, "In how many multi-million-dollar companies can you yell Buttface, and the partners, the heads of development, production, marketing, finance, and the corporate counsel turn around thinking it's him?"93 Johnson's line caught on, and the top management meetings became known as Buttfaces." In 1976, important changes occurred both inside and outside of the fast-growing, geographically dispersed company. Inside Knight moved the company into a new 46,000-square-foot building in the Portland suburb of Beaverton.95 Outside, Knight became worried about the converging pressures of Japanese manufacturing companies moving up-market to produce goods like cars and electronics, and American politicians moving to support protectionist legislation. He put Moodhe in charge of finding alternate suppliers in Korea, and sent Johnson to establish a domestic shoe factory in Exeter, New 94 9 Hampshire. Production capacity at Exeter was not nearly enough to satisfy Nike's sales volume, but Knight viewed the state-of-the-art East Coast factory as a secret development site for cutting-edge ideas. In his new role as factory manager in Exeter, Johnson was responsible for supplying Bowerman's workshop in Eugene with materials. Johnson sent supplies to Bowerman's assistant, who failed to notify Bowerman that the materials had arrived. Consequently, Bowerman had many complaints about Johnson, and when the two met in 1976, Bowerman launched into an expletive-laden tirade before storming away. Afterwards, Bowerman's assistant told Knight that he did indeed receive the supplies, but that it must have slipped through the cracks. Knight insisted that the unorthodox business practices held over from the BRS days had to be replaced by an effort at professionalization from the top down. To help signal this change, Knight attempted to institute a dress code. When Bob Woodell showed up to work dressed too casually, Knight sent him home. The next day, to show their support for Woodell, his fellow managers showed up to work wearing wildly mismatched suits. Knight was not amused. Knight felt that he was losing control of his key people. By 1979, the "Buttfaces" became more formal, with regular agendas and presentations from the key managers in charge of marketing, production, and development in Exeter and in Beaverton. Communication during these meetings became especially important since the men no longer saw one another regularly and the company was expanding rapidly, with sales continuing to double every year. However, accustomed to receiving Knight's okay,"Strasser and Hayes still often acted without waiting for Knight's approval. For example, Strasser, working as director of marketing, had recently taken a new product line to market too quickly, culminating in thousands of return orders and doing damage to the Nike brand. Hayes, working as head of production, had gone to Maine on company business and bought a factory without express authorization to do so from Knight At first, Knight reacted by sending Hayes to run the factory himself. Next, Knight disinvited Strasser and Hayes from the 1979 "Buttface," then reinvited them. Finally, Knight decided to restructure his top management team and reorganize the entire corporation into two divisions. The first division would include manufacturing, corporate technology, and personnel, and the second division would be comprised of product lines, marketing, distribution, advertising, retail stores, promotions, and exports. At the 1979 "Buttface, " Knight announced the restructuring. He made Hayes head of the first division and initially, made Strasser the head of the second division. Soon after, Knight decided to appoint Woodell to head up marketing, distribution, and sales, moving Strasser to the new position of international development," while Moodhe moved back to the U.S. and was demoted to apparel. (See Exhibits 3 and 4 for organizational charts.) Risking the Throne In 1978, the company officially changed its name to Nike, Inc., and by 1980 had become the number one athletic shoe company in the U.S. Sales had grown exponentially from $14 million in 1976 to $270 million in 1980. (See Exhibit 5 for selected company financials.) Nike dominated the market for basketball shoes, had made significant inroads into tennis, and had helped running grow into a movement. Nike had over 2.300 employees and two domestic factories. During the semiannual "Buttface" in the spring of 1980, Knight raised the question of whether to take the company public. He believed "the best time to get money is when you don't need it," even though it would mean that the very private company would be under intense scrutiny. Also, the company's internal systems had not kept pace with growth, and might not have been appropriate for 10 a public company. The company lacked job titles and organization charts with clear reporting structures, and Hayes and Strasser still argued that they worked better when they could dress however they liked and could act quickly without getting permission. The meeting adjourned without a decision. Although the question of whether to go public loomed, Knight did not address the issue during the annual shareholders' meeting in the fall. Instead, he rushed through the entire meeting in seven minutes. The long-time minority stockholders were furious; although Nike had clearly become very valuable, they had yet to see a return on their investments. But Knight refused to discuss the subject on the grounds that the meeting had already been adjoumed. At that point, Knight looked at Moodhe's stock holdingwhich was on par with what the other top executives held and decided that he held too much stock. Although Moodhe had been the brainchild behind the "Futures" program, which had allowed Nike to circumvent their earlier financial shortcomings by shifting the risk to large retailers, Knight felt Moodhe had grown complacent as a salesman, prioritizing expanding his collection of expensive European cars over his responsibilities to Nike Knight called Moodhe into his office and told him to sell half of his stock back to Knight, to be redistributed to Hollister and other key employees. (See Exhibit 6 for a list of equity redistributions.) If he refused, Knight had the power to go to the board of directors and ask it to vote new shares or revoke those already sold to key people in the top management team. (See Exhibit 7 for director biographies.) In the end, Moodhe complied with Knight's edict. Later that year, Knight announced that Nike was going public. In preparation for the IPO, the Nike team received formal titles. Knight became chairman of the board of directors and president; Bowerman senior vice president and director; Hayes, executive vice president and director: Johnson, vice president of corporate technology, and Strasser and Woodell vice presidents. Negotiating with the Wall Street banks from a position of strength, Hayes crafted a unique offering, Nike created two classes of stock. All shares held by previous investors, officers, and directors would become Class A, which had more powerful voting rights. Class A stock could not be traded on the public market, but could be converted into Class B on a one-to-one basis and sold. For its IPO,Nike would sell 2.4 million shares of Class B stock, with prior investors, officers, and directors retaining 15.2 million shares of Class A stock-about 86% of all common stock. According to the terms of the offering, if the Nike board did not grow larger than its current size of seven, the most Class B stockholders could ever hope for was to elect one representative. As it stood in late 1980, officers and directors owned 56.4% of outstanding shares, and they had the power to elect all seven directors. Nike went public on December 2, 1980, at S22 per share. After selling S3 million worth of his own stock, Knight still owned 46.2% of the remaining Class A shares, worth almost $180 million. (No other shareholder had more than 5%.) Bowerman, who had once been a 49% partner in BRS, now owned 2.7% of the shares, worth almost $10 million. Aerobics Are Not Nike! Johnson was in his 700-square-foot house in Newton, New Hampshire, cating a TV dinner, when he got a call telling him that the IPO had been successful and he was worth over $6 million. Johnson 11 had followed Knight for a decade and a half through the twists and turns of BRS and Nike. Along the way, he had been uprooted more times than he could count and had seen two marriages end in divorce. He woke up his cat and told him, "We're rich!" The cat looked up, rolled over, and went back to sleep. The other new Nike millionaires adjusted to their new lifestyles. Strasser investigated buying a nightclub in Shanghai, and put a $25,000 European treasure hunt in his will. Woodell took up flying as a hobby, and bought himself a plane. But both men would soon divorce and go on to marry former Nike employees. Managers spent so much time away from home that their wives were sent T-shirts from the company bearing the heading "Nike Widow." Even Knight's wife filed, but later withdrew, divorce papers. After the IPO, Johnson became frustrated with the company's direction. He distributed a series of cautionary memos throughout the organization which warned that Nike was growing out of touch with consumer demands. Although Knight eventually met with Johnson and agreed with his assessment, Knight seemed unperturbed and moved on to his next meeting. At the late-1982 "Buttface," Knight again proposed to reshuffle the top managers. When Johnson saw that there was no immediate job for him in the new structure, he seized the opportunity to quit in front of everybody at the meeting. Forty-eight hours later, Knight met with 30 mid-level managers to formally announce that Jeff Johnson, Nike's first employee, was leaving the company after 17 years. Bowerman also disliked the new culture of the company, especially when he encountered resistance about his product designs from midlevel managers with whom he had never dealt before. Each time, Bowerman complained to Knight and asked to be removed from the board, a request to which Knight and the other directors never consented. (This cycle would continue, with varying intensity until Bowerman stepped down as a director in June 1999.) In the 1980s, aerobic exercise became an important trend for women, riding the same fitness wave that had helped catapult Nike's sales a decade earlier. Participants in aerobic exercise could enroll in classes with an instructor or watch videos on television, and generally combined elements of dance, calisthenics, gymnastics, and moderate weightlifting in their workouts. The spouses of prominent Nike employees, including Barbara Bowerman, were active participants in aerobics who pressured the company to introduce shoes for the aerobics market. In 1981, a Nike product development employee in Exeter pushed to get the company to make aerobic shoes. But her attempts to raise the issue in midlevel meetings fell flat, and the idea never got up the chain to Johnson, much less Hayes-who was now managing development along with a portfolio of other back-end operations. In 1982, Reebok, a three-year-old American company, had sales of $3.5 million and was barely a blip on Nike's radar. The next year, Reebok introduced its "Freestyle" model targeted at the female aerobics enthusiast. When the product team at Exeter saw the Freestyle, they laughed. The Freestyle emphasized fashionable style and comfort, but Nike employees only saw functional deficiencies and improper support for competitive athletes. By mid-1985, Reebok had $307 million in sales, 47% from acrobic shoes, 29% from "no break-in" tennis shoes. In 1986, Reebok's sales tripled, and by 1987, the upstart company had overtaken Nike for the top spot in the U.S. market Knight reflected on the fate of his company: "We used to say if we had the best athletes in the best shoes, we couldn't lose.... But guess what? Reebok went by us with what we thought were terrible shoes. They were so soft they ripped apart . We asked women why they wore them. They said they were comfortable. We asked what they did when they ripped apart. 'Oh, buy another pair.""In 1987, on the day it was announced that Reebok's sales had overtaken Nike's, Knight was devastated. 12