Case Study:

Nike's Core Competency: The Risky Business of CreatingHeroes

DURING THE LAST DECADE, Nike's annual revenues doubled and by2018 attained some $35 billion. With its globally recognized brand,Nike is the undisputed leader in the athletic shoe and apparelindustry. Number two adidas has some $22 billion in sales, whilerecent entrant Under Armour reports revenues of $5 billion. Nike istremendously successful, holding close to a 60 percent market sharein running shoes and nearly a 90 percent market share in basketballshoes and apparel. Yet one of its greatest strengths can also beseen as one of its greatest vulnerabilities. Before we introducethat strength, it helps to know how Nike started.

Nike Co-founders:

Bill Bowerman and Phil Knight

The Beaverton, Oregon, company has come a long way from itshumble beginnings. It was founded by University of Oregon track andfield coach Bill Bowerman and middle-distance runner Phil Knight in1964 and was first called Blue Ribbon Sports. In 1971, the companychanged its name to Nike (Greek mythology's goddess of victory)with the now iconic "swoosh" designed by a Portland StateUniversity student.

BOWERMAN'S ROLE. Coach Bowerman was a true innovator because heconstantly sought ways to give his athletes a competitive edge. Heexperimented with many factors affecting running performance, fromdifferent track surfaces to rehydration drinks. Bowerman's biggestfocus, however, was on providing a better running shoe for hisathletes. While sitting at the breakfast table one Sunday morningand absentmindedly looking at his waffle iron, Bowerman had anepiphany. He poured hot, liquid urethane into the waffleiron—ruining it in the process but coming up with the now famouswaffle-type sole that not only provided better traction but wasalso lighter than traditional running shoes.

ENTER KNIGHT. After completing his undergraduate degree at theUniversity of Oregon and serving in the U.S. Army, Phil Knightentered the MBA program at Stanford. One entrepreneurship classrequired him to come up with a business idea. He wrote a term paperon how to disrupt the leading athletic shoemaker, adidas. Theresearch question he came up with was, "Can

Japanese sports shoes do to German sports shoes what Japanesecameras have done to German cameras?"

At that time, adidas athletic shoes were the gold standard. Theywere also expensive and hard to find in the United States. Afterseveral failed attempts to interest Japanese sneaker makers, Knightstruck a distribution agreement with Tiger Shoes. After his firstshipment arrived in the United States, Phil Knight sent some of therunning shoes to his former coach, Bill Bowerman, hoping to make asale. To his surprise,

Bowerman replied that he was interested in becoming a businesspartner and contributing his innovative ideas on how to improverunning shoes, including the waffle design. With an investment of$500 each and a handshake, the venture commenced.

Creating Heroes

Nike had already reached a level of success by the late 1970s.Based on a highly successful string of innovations including NikeAir, by 1979 the company had captured more than a 50 percent marketshare for running shoes in the United States. A year later, Nikewent public. Even so, the company had yet to establish one of itsmost effective marketing tactics.

In 1984, Nike signed Michael Jordan—still early in his career,before he was hailed by many as the greatest basketball player ofall time—with an unprecedented multimillion-dollar endorsementdeal. Rather than spreading its marketing budget more widely as wascommon in the sports industry at that time, Nike made theunorthodox move to spend basically its entire budget for a specificsport on a single star athlete. Nike sought to sponsor futuresuperstars that embodied an unlikely success story. Michael Jordandid not make the varsity team as a junior in high school, and yethe became the greatest basketball player ever. Nike's Air Jordanbasketball shoes are all-time classics that remain popular to thisday.

In the 1990s and 2000s, Nike continued to sponsor track andfield stars such as Marion Jones as well as Kobe Bryant inbasketball. With the help of major celebrity endorsements, Nike wasalso able to move on to different sports and their superstars,including golf with Tiger Woods, cycling with Lance Armstrong,soccer with Wayne Rooney, and football with Michael Vick. If someof those names trigger memories of scandals as well as athleticachievements, you see the problems that Nike risks with itsendorsement program. Before going into the negatives, let's examinethe powerful message behind such endorsements.

Nike is less about running shoes or sports apparel than aboutunlocking human potential. This is captured in Nike's mission tobring inspiration and innovation to every athlete in the world (andif you have a body, you are an athlete). ² Nike uses itsheroes to tell a story whose moral is that through sheer will,tenacity, and hard work, anyone can unlock the hero within andachieve amazing things. Nike will help everyone become a hero. JustDo It! This type of mythical brand image has allowed Nike to notonly enter but also often

Oscar Pistorius (left) and Lance Armstrong (right), some ofNike's past celebrity endorsements.

dominate one sport after another, from running to ice hockey. Itspends more than $1 billion a year sponsoring athletes. Nike picksathletes that succeeded against the odds—cancer survivor LanceArmstrong, double amputee "blade runner" Oscar Pistorius, and otherathletes hailing from disadvantaged backgrounds.

Nike astutely focuses on its core competency in athletesponsorship and design, while it outsources noncore activities suchas manufacturing and much of retailing. To create heroes, Nike hasto engage in a number of activities: Find athletes that succeedagainst the odds; identify them before they are wellknownsuperstars; sign the athletes; create products that are closelylinked with the athlete; promote the athletes or teams and Nikeproducts through TV ads and social media to create the desiredimage; and so on. Each activity contributes to the relative valueof the product and service offering in the eyes of potentialcustomers and the firm's relative cost position vis-å-vis itsrivals. Over time, Nike developed a deep expertise in creatingheroes. More importantly, having consistently better expectationsof the future value of resources allows Nike not only to shape thedesired image of the athlete, but also to capture some of the valuethese athletes create.

When Heroes Fall

Although this core competency made Nike highly successful, ithas not been without considerable risks. Repeatedly, Nike's"heroes" have become unmasked as cheaters, frauds, and criminals,some of whom have committed serious felonies, such as (culpable)homicide. Long-time CEO and Chairman Phil Knight long ago declaredthat scandals surrounding its superstar endorsement athletes are"part of the game."3 So Nike appears to be comfortable intolerating those risks, at least in some cases.

Sometimes Nike continued to sponsor its athletes involved invarious scandals; other times it terminated its lucrativeendorsement contracts. Nike continued to sponsor NBA star KobeBryant who was cleared of alleged rape charges. After Tiger Woodswas engulfed in an infidelity scandal, Nike continued to sponsorthe golf superstar. In 2007, Nike ended its endorsement contractwith NFL quarterback Michael Vick after a public outcry and hissubsequent felony conviction of running a dog-fighting ring andengaging in animal cruelty. In 2011, after serving a prisonsentence and restarting his career at the Philadelphia Eagles, Nikesigned a new endorsement deal with Vick. In 2012, Nike terminatedits long-term relationship with disgraced cyclist Lance Armstrong.Just before Armstrong's public admission to doping in an interviewwith Oprah Winfrey, Knight answered, "Never say never," when askedif Nike would sponsor Armstrong again in the future. In 2013, Nikeremoved its ads with Oscar Pistorius and the unfortunate tagline "Iam the bullet in the chamber," after the South African track andfield athlete was charged with homicide.

In 2014, Nike got entangled in the FIFA (the world governingbody of soccer) bribery scandal. It began 20 years earlier whenNike decided to gain a stronger presence in soccer after the 1994World Cup was held in the United States. In 1996, Nike signed along-term sponsorship agreement with the Brazilian national teamworth hundreds of millions of dollars. This was a huge win for Nikebecause soccer has been the basis of adidas' success, much likerunning and basketball has been for Nike. Moreover, Brazil won thetournament five times (more than any other nation) and is the onlyteam to have played in every tournament, which is only held everyfour years.

Nike is now alleged to have paid some $30 million to amiddleman, who used that money for bribing

soccer officials and politicians in Brazil. This middleman—JoseHawilla—has admitted a number of crimes including fraud, moneylaundering, and extortion related to the FIFA soccer investigationby U.S. prosecutors.

Time and time again Nike's heroes have fallen from grace, andthe company itself has fallen under suspicion of wrongdoing.Clearly, Nike's approach in building its core competency ofcreating heroes is not without risks. Too many of these publicrelations disasters combined with too severe shortcomings of someof Nike's most celebrated heroes could damage the company'sreputation and lead to a loss of competitive advantage. As Nikeveers from one public relations disaster to the next,disappointment with the brand and its promise may eventually setin, causing customers to go elsewhere.

DISCUSSION QUESTIONS

1.     The MiniCase indicates thatNike's core competency is to create heroes. What does this mean?How did Nike build its core competency? Does it, for example,identify and leverage the potential identified in a VRIO analysis(are its competencies valuable, rare, inimitable, and organized tocapture value) in a resource-based view of the firm?

2.     What would it take for Nike'sapproach to turn from a strength into a weakness? Did this tippingpoint already occur? Why or why not?

3.     What recommendations would youhave for Nike? Can you identify a way to reframe the competency ofcreating heroes? Or a new way to think of heroes, teams, or sportsthat would continue to build the brand?

4.     If you are a competitor of Nike(such as adidas, Under Armour, New Balance, or Li-Ning), how couldyou exploit Nike's apparent vulnerability?

Provide a set of concrete recommendations.

(Must be atleast 2 pages long)