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Chapter 5
Closing Case: Nike’s Business-Level Strategies
Nike, headquartered in Beaverton, Oregon, was founded over thirty years ago by Bill
Bowerman, a former University of Oregon track coach, and Phil Knight, an entrepreneur
in search of a profitable business opportunity. Bowerman’s goal was to dream up a new
kind of sneaker tread that would enhance a runner’s traction and speed, and he came up
with the idea for Nike’s “waffle tread” after studying the waffle iron in his home.
Bowerman and Knight made their shoe and began by selling it out of the trunks of their
car at track meets. From this small beginning Nike has grown into a company that sold
over $12 billion worth of shoes in the $35 billion athletic footwear and apparel industries
in 2004.i
Nike’s amazing growth came from its business model, which has always been based on
two original functional strategies: to innovate state-of-the-art athletic shoes and then to
publicize the qualities of its shoes through dramatic “guerrilla” marketing. Nike’s
marketing is designed to persuade customers that its shoes are not only superior but also a
high fashion statement and a necessary part of a lifestyle based on sporting or athletic
interests. A turning point came in 1987 when Nike increased its marketing budget from
$8 million to $48 million to persuade customers its shoes were the best. A large part of
this advertising budget soon went to pay celebrities like Michael Jordan millions of
dollars to wear and champion its products. The company has consistently pursued this
strategy and many other sporting stars, such as Tiger Woods and Serena Williams are
part of its charmed circle.
Nike’s strategy to emphasize the uniqueness of its product paid off; its market share
soared and its revenues hit $9.6 billion in 1998. However, 1998 was also a turning point,
for in that year sales began to fall. Nike’s $200 Air Jordans no longer sold like they used
to, and inventory built up in stores and warehouses. Suddenly it seemed much harder to
design new shoes that customers perceived to be significantly better and Nike’s stunning
growth in sales was actually reducing its profitability--somehow it had lost control of its
business strategy. Phil Knight, who had resigned his management position, was forced to
resume the helm and lead the company out of its troubles. He recruited a team of talented
top managers from leading consumer products companies to help him improve Nike’s
business model. As a result, Nike has changed its business strategies in some
fundamental ways.
In the past, Nike shunned sports like golf, soccer, rollerblading, and so on and focused
most of its efforts on making shoes for the track and basketball market to build its market
share in this area. However, when its sales started to fall, it realized that using marketing
to increase sales in a particular market segment can only grow sales and profits so far; it
needed to start to sell more types of shoes to more segments of the athletic shoe market.
So Nike took its design and marketing competencies and began to craft new lines of
shoes for new market segments. For example, it launched a line of soccer shoes and
perfected their design over time, and by 2004 it had won the biggest share of the soccer
market from its archrival Adidas.ii In addition, in 2004 it launched its Total 90 III shoes,
which are aimed at the millions of casual soccer players throughout the world who want a
shoe they can just “play” in. Once more, Nike’s dramatic marketing campaigns aim to
make their shoes part of the “soccer lifestyle,” to persuade customers that traditional
sneakers do not work because soccer shoes are sleeker and fit the foot more snugly.iii
To take advantage of its competencies in design and marketing, Nike then decided to
enter new market segments by purchasing other footwear companies that offered shoes
that extended or complemented its product lines. For example, it bought Converse, the
maker of retro-style sneakers; Hurley International, which makes skateboards and Bauer
in-line and hockey skates; and Official Starter, a licensor of athletic shoes and apparel
whose brands include the low-priced Shaq brand. Allowing Converse to take advantage
of Nike’s in-house competencies has resulted in dramatic increases in the sales of its
sneakers, and Converse has made an important contribution to Nike’s profitability.iv
Nike had also entered another market segment when it bought Cole Haan, the dress
shoemaker, in the 1980s. Now it is searching for other possible acquisitions. It decided to
enter the athletic apparel market to use its skills there, and by 2004 sales were over $1
billion. Nike made all these changes to its product line to increase its market share and
profitability. Its new focus on developing new and improved products for new market
segments is working. Nike’s profits have soared from 14% in 2000 to 25% in 2007, it
makes over $1 billion profit a year.
Case Discussion Questions
1. What business-level strategies is Nike pursuing?
2. How have Nike’s business-level strategies changed the nature of industry competition?
i
www.nike.com, 2008.
ii
www.nike.com (2004), press release; “The New Nike,” yahoo.com (2004),
September 12.
iii
A. Wong, “Nike: Just Don’t Do It,” Newsweek, November 1, 2004, p. 84.
iv
www.nike, 2008.