From: acquiredfm
Nike’s journey to becoming the world’s largest apparel business has been marked by significant challenges and controversies, spanning from its earliest days as Blue Ribbon Sports to its modern global presence.
Early Financial Struggles and Disputes
In its nascent years, Blue Ribbon Sports, the precursor to Nike, faced persistent financial hurdles due to its lean operating model. The initial business plan, conceived by Phil Knight, was to import Japanese athletic shoes to undercut German competitors like Adidas, but this strategy was initially met with skepticism from academia due to the perceived small market for track shoes at the time [00:14:37].
Limited Capital and Bank Reluctance
The company operated with very little capital, relying heavily on debt financing from regional banks [00:38:13]. This reliance led to precarious situations, as banks were risk-averse and didn’t understand the concept of valuing a growing enterprise beyond its tangible assets [00:39:04].
Growth as a Problem
Phil Knight’s projection of $16,000 in sales for Blue Ribbon Sports’ second year was considered a “very troubling trend” by his banker, who stated, “Your rate of growth is too fast for your equity… Growth off your balance sheet is dangerous.” [00:39:17] This mindset meant banks would only lend up to the amount the company already possessed in assets [00:40:07], leading to a “circular issue” where profits from previous sales were the sole source for new inventory orders [00:35:07].
This extreme leverage meant Blue Ribbon Sports was constantly betting the farm to stay afloat [00:55:56], with Phil Knight and his wife even putting up their house as loan collateral at one point [00:36:17]. The precarious financial situation led to instances where checks bounced for payroll, and the company was even investigated by the FBI for fraud [01:10:51].
The Onitsuka Conflict
The reliance on Onitsuka as a supplier led to a contentious relationship. As Blue Ribbon Sports grew, Onitsuka became nervous about the distribution agreement, fearing Blue Ribbon would eventually seek direct manufacturing relationships [01:11:14].
- Onitsuka attempted to buy out Phil Knight’s company for its “book value” [01:12:05], which was close to zero given all capital was tied up in inventory [01:12:21].
- Phil Knight stalled on the buyout offer, knowing he needed to transition away from Onitsuka [01:13:00].
- In a controversial move, Phil Knight “stole some documents out of the guy’s briefcase” during a meeting with Onitsuka management [01:13:45] and later wrote an internal memo stating he hired a spy at Onitsuka [01:14:09]. These actions later complicated legal discovery [01:14:15].
- Nike began secretly producing football cleats in a Mexican factory, which technically did not violate their “track and field” exclusive agreement but was still a “toe over the line” [01:15:22]. These cleats, named “Nike,” had a manufacturing flaw, cracking in cold temperatures, leading to an “inauspicious start” for the brand [01:21:47].
The relationship ended in a “literal Mexican standoff” that ultimately led to legal battles, which Blue Ribbon Sports eventually won, settling for $400,000 from Onitsuka [01:19:21].
Facing New Competition and Internal Strife
After going public in 1980, Nike, which was primarily a running shoe company for men [02:07:30], grew complacent.
Mistaking a Boom for a Trend
Nike “mistook the running and the jogging boom for the broader Fitness Boom” [02:10:07]. While the fitness boom continued, the running boom was a cyclical trend [02:10:24]. By the early 1980s, running and jogging were “out,” and Nike “absolutely refused to see that” [02:10:45].
This led to Reebok, a new competitor, eclipsing Nike in sales by 1988 by capitalizing on the aerobics fad with shoes that were stylish, soft leather, and popular with women – “everything that Nike was not” [02:11:55].
Rob Strasser’s Departure and “Betrayal”
Rob Strasser, Nike’s first head of marketing and a key figure in securing the Michael Jordan deal [01:51:21], became increasingly “rogue” within Nike. He formed a new “New Products Division” to streamline product launches, which ironically led to the “sucked” Air Jordan 2 [02:33:10], an expensive, stiff, Italian-leather shoe that Jordan himself disliked [02:32:48].
Strasser’s ambition clashed with Phil Knight’s leadership, leading to a major fight in 1987 and Strasser’s departure [02:34:48]. The “terrible betrayal” [00:05:06] occurred when Strasser, along with designer Peter Moore, started a consulting firm that eventually became Adidas America’s CEO [02:35:32]. This move was viewed as “an intolerable betrayal” by Phil Knight, who never forgave him and did not attend Strasser’s funeral [02:37:04].
Manufacturing Labor Controversies
Nike’s strategy of global outsourcing for manufacturing, which began in Japan and later expanded to Taiwan, South Korea, China, Indonesia, and Vietnam [01:43:05], came with significant social costs.
- In the 1990s, stories emerged about “child labor stitching soccer balls on dirt floors” and factories using “toxic glues” with carcinogens [01:44:47].
- Nike “wildly mishandled” the initial public outcry, claiming “we don’t make shoes” and acting as if it wasn’t their problem [01:45:21]. This stance was later walked back by Mark Parker, who admitted “ignorance is not Bliss” [01:45:30].
- While Nike later implemented new standards, published supplier lists, and conducted third-party audits [01:45:38], the issue highlighted a discomfort with manufacturing conditions in developing countries, where wages might be low despite being better than local alternatives [01:46:11]. Critics felt Nike “intentionally turned a blind eye to what was going on in the factories” [01:46:50].
A Core DNA Element
The labor issues were seen as “The Natural end point of an idea that had been in the company’s DNA the whole time” [01:45:04], stemming from Phil Knight’s original Stanford paper on arbitraging cheap labor from imported goods [01:45:09].
Recent Business Headwinds and Challenges
While Nike has enjoyed decades of success, recent years have presented new challenges.
- Executive Leadership and Culture: In 2018, the company faced significant MeToo issues at the executive level, leading to the departure of a presumed CEO successor and other key personnel [03:05:53].
- The Oregon Project: Nike’s competitive running group, the Oregon Project, faced a doping scandal and alleged abuse, requiring the company to “clean things up and write the ship” [03:06:07].
- Organizational Reorganization: A major reorg shifted focus from individual sports teams to broader categories like men’s, women’s, and kids’ [03:50:32]. The bear case for this is a potential loss of “obsession and focus on these individual sports and the Journeys in these Sports” [03:52:16], which could open the door for niche competitors like Hoka and On [03:52:51].
- Direct-to-Consumer Transition: Nike’s long-term strategy to shift to direct-to-consumer (D2C) sales has seen recent reversals, with the company re-engaging with retailers like Macy’s and Foot Locker [03:54:12]. This has raised concerns about inventory overload and discounting through wholesale channels [03:54:27].
- China Market: There has been a “big slowdown in China” [03:54:39] for all major brands, with signs that the Chinese market is shifting towards native Chinese brands [03:54:44]. How Nike’s social justice stances align with the CCP-controlled market remains a “huge open question” [03:54:56].
- Kanye West Partnership (Adidas’s Loss): While not a direct Nike controversy, Nike’s strategic decision to “drive a really hard bargain” [03:47:02] with Kanye West in 2015 (who later joined Adidas) exemplified Nike’s focus on athletes over celebrities. Kanye’s subsequent controversies caused a “disastrous situation” for Adidas, resulting in significant net losses [03:47:40], which may be viewed as a validation of Nike’s approach.
Despite these challenges, Nike’s ability to navigate crises, leverage its scale, and maintain its brand’s inspiring message has allowed it to sustain its market leadership and continues to be “a growth company” [03:18:01].