World Changers

These days, business schools toss seed money to MBA students who pitch new business ideas in competition with one another. Ultimately, the schools churn out thousands of entrepreneurs with well-formed business plans every year. But back in 1962, precious few graduates left school with an MBA diploma in one hand and a business plan in the other. Phil Knight was one of them.

While at Stanford Graduate School of Business in the early 1960s, Knight found himself in a small business class that would ultimately change his life. He had been known as an indifferent student during his undergraduate years at the University of Oregon, where he majored in journalism. But after a stint in the U.S. Army, he applied to Stanford and got in.

It was during Knight’s second year that he took an elective course taught by Professor Frank Shallenberger. Known at Stanford as “the father of small business,” Shallenberger devoted a significant part of his scholarly focus to the problems of start-ups and small companies at a time when almost all professors were far more interested in large-scale corporations. It was there in the professor’s class that Knight brought his imaginative mind to bear on an idea that would some day become one of the most successful companies ever, Nike.

Shallenberger’s assignment to his class was as standard as the task to write an obituary is in a basic journalism class: invent a new business, describe its purpose, and create a marketing plan for it. But Knight’s resulting paper did more than merely toss out a new business idea. It asked a simple though compelling question: “Can Japanese Sports Shoes Do to German Sports Shoes What Japanese Cameras Did to German Cameras?” The paper went on to describe a plan to produce superior athletic shoes in Japan, where labor costs were substantially lower than in Germany or the United States. In other words, Knight foresaw the possibility that a different business model for making shoes could potentially disrupt the existing marketplace.

“That class was an ‘aha!’ moment,” Knight recalled years later. “First, Shallenberger defined the type of person who was an entrepreneur—and I realized he was talking to me. I remember after writing that paper, saying to myself: ‘This is really what I would like to do.’”

Knight’s father, a lawyer and newspaper publisher in Portland, Oregon, had other ideas. He wanted his son to land a “real” job with an accounting firm. Knight acquiesced, but before starting his position as an accountant, he followed up on the curiosity expressed in his term paper. He flew to Japan, where he became captivated by Japanese business practices and culture. During that trip, in November 1962, Knight stopped in Kobe, where he discovered Tiger brand running shoes made in Kobe by the Onitsuka Tiger Co. They were knockoffs of more expensive shoes made by Adidas.

But Knight was so impressed with the quality and low cost of the shoes that he talked his way into a meeting with the company owner, Mr. Onitsuka. Before he left, Knight had gotten the Japanese entrepreneur to allow him to sell Tiger’s shoes in the United States. The first samples from Onitsuka arrived in January 1964, and Knight immediately mailed two pairs to his old track coach Bill Bowerman at the University of Oregon in Eugene. Bowerman was something of a legend at the school. He had been an Olympian himself, an Olympic coach, and an inspirational mentor to many. He had been handcrafting shoes for his runners since the 1960s to give them an edge in racing. Knight, who had been a middle distance runner for Bowerman, was merely hoping to get an endorsement from his old coach to help him sell the imported shoes.

Instead, Bowerman wanted to become a partner with Knight, offering to provide some design ideas for better running shoes. They each threw in $500, shook hands, and created Blue Ribbon Sports in January 1964. For Knight, this was little more than a side business while he did his accounting work. But the first shipment of three hundred pairs arrived three months later and sold out in three weeks. In the first year, the company produced profits of $3,240.

In the very beginning, Knight would drive his green Plymouth Valiant to local and regional track meets across the Pacific Northwest, selling Tiger running shoes from the back trunk. Other times, he would sell them out of his father’s basement. But by 1969, Blue Ribbon’s sales reached $1 million, and Knight quit his job teaching accounting at Portland State University and never looked back. In 1972 Bowerman and Knight began manufacturing their own shoes. Bowerman used his wife’s waffle iron to create a shoe with greater traction than those currently on the market. “The idea was that we can make shoes that runners want,” Knight says.

Blue Ribbon was an okay name for a running shoe importer, but it lacked sex appeal as a brand name for a running shoe. So Knight thought up the name “Dimension Six.” It went nowhere. Instead, it was a friend, fellow runner and first employee Jeff Johnson, who proposed a name that came to him in a dream: Nike, for the Greek winged goddess of victory.

“Now that we had a name, we had to have a trademark for the side of the shoe,” says Knight. “It was 1971, and Ford had spent two million dollars getting a trademark. We didn’t have two million dollars, so I went by the graphic arts department at Portland State, and there was a woman there saying, ‘I don’t know how I’m going to get enough money for the dress for this prom.’ And I said, ‘I have a job for you.’ I paid her two dollars an hour, and she spent seventeen and a half hours. So thirty-five dollars and she came up with what is now the swoosh.”

Ending its relationship as an importer of shoes in 1972, Knight began manufacturing running shoes in Mexico, designed by Bowerman, under the brand name Nike. The company took off. It sold $3.2 million of shoes in 1972, and the next year, Knight signed his first professional athlete, Romanian tennis star Hie Nastase, to an endorsement contract. Profits doubled each of the next ten years. When Nike went public in 1980, it passed Adidas to become the industry leader. And when Knight convinced a young basketball player named Michael Jordan in 1984 to endorse a sneaker, Nike became a true marketing phenomenon. “He was a great player, he was handsome, he was articulate, he was educated, and he was perfect,” Knight says. “He was sent from central casting, and we jumped on it right away.”

But he also admits a little luck helped out. “It wasn’t planning,” concedes Knight. “We could see that he was a charismatic guy who jumps over the moon and is very competitive, but nobody could have predicted what he would become to our culture.”

Or, for that matter, to Nike. The success of that celebrity endorsement would pave the way for a strategy that would revolutionize the business. Today, Nike has annual revenues of some $19 billion and employs more than 36,000employees around the world, including 7,000 people at its headquarters in Beaverton, Oregon. Knight remains chairman of the company.

Up until the time I was fourteen years old, I was sure that I was going to be a big-league baseball player. But that dream came to a rude awakening when I got cut from my high school baseball team. I switched to track in college. I was very aware of shoes when I was running track. The American shoes were offshoots of tire companies. Shoes cost $5, and you would come back from a five-mile run with your feet bleeding. Then the German companies came in with $30 shoes, which were more comfortable. But [Bill] Bowerman still wasn’t satisfied. He believed that shaving an ounce off a pair of shoes for a guy running a mile could make a big difference. So Bowerman began making shoes himself, and since I wasn’t the best guy on the team, I was the logical one to test the shoes.

He was a great leader and great man, and being able to be associated with him is a big part of the dream. He was about teaching you how to respond competitively to different challenges. Obviously, they were on the track, and they were about getting prepared to compete and competing well and competing better than you thought you could do, and accepting victory and defeat.

We had no master plan. It was totally seat-of-the-pants. At first, we couldn’t be establishment, because we didn’t have any money. We were guerrilla marketers, and we still are, a little bit. But as we became number one in our industry, we’ve had to modify our culture and become a bit more planned.

We’re not in the fashion business, as The Wall Street Journal wrote the other day. We’re in the sports business, and there’s a big difference. Sports is like rock and roll. Both are dominant cultural forces, both speak an international language, and both are all about emotions.

We think that athletes are human beings and have foibles just like human beings do. We’ve known [Tiger] for eighteen years and worked with him for fifteen, and he had a three-year span in there where he kind of went off the reservation a little bit in some of the things he was doing, which he apologized [for] to the company and everybody involved. We think the essence of Tiger Woods is basically very, very good, and over the long run, people will see that.

Sometimes I look out there and I get goose bumps. But you better not spend much time doing that, because every six months is a new lifetime, and you’ve got to worry about what’s coming up to stay ahead of the curve. If you want to spend time saying this is cool, you’re going to get your ass kicked.

For years, we thought of ourselves as a production-oriented company, meaning we put all our emphasis on designing and manufacturing the product. But [we came to] understand that the most important thing we do is market the product. We’ve come around to saying that Nike is a marketing-oriented company, and the product is our most important marketing tool. What I mean is that marketing knits the whole organization together. The design elements and functional characteristics of the product itself are just part of the overall marketing process.

We used to think that everything started in the lab. Now we realize that everything spins off the consumer. And while technology is still important, the consumer has to lead innovation. We have to innovate for a specific reason, and that reason comes from the market. Otherwise, we’ll end up making museum pieces.

In the early days, when we were just a running shoe company and almost all our employees were runners, we understood the consumer very well. There is no shoe school, so where do you recruit people for a company that develops and markets running shoes? The running track. It made sense, and it worked. We and the consumer were one and the same. When we started making shoes for basketball, tennis, and football, we did essentially the same thing we had done in running. We got to know the players at the top of the game and did everything we could to understand what they needed, both from a technological and a design perspective. Our engineers and designers spent a lot of time talking to the athletes about what they needed both functionally and aesthetically.

We were missing an immense group. We understood our “core consumers,” the athletes who were performing at the highest level of the sport. We saw them as being at the top of a pyramid, with weekend jocks in the middle of the pyramid, and everybody else who wore athletic shoes at the bottom. Even though about 60 percent of our product is bought by people who don’t use it for the actual sport, everything we did was aimed at the top. We said, if we get the people at the top, we’ll get the others because they’ll know that the shoe can perform.

But that was an oversimplification. Sure, it’s important to get the top of the pyramid, but you’ve also got to speak to the people all the way down. Just take something simple like the color of the shoe. We used to say we don’t care what the color is. If a top player like Michael Jordan liked some kind of yellow and orange jobbie, that’s what we made—even if nobody else really wanted yellow and orange. One of our great racing shoes, the Sock Racer, failed for exactly that reason: we made it bright bumblebee yellow, and it turned everybody off.

Whether you’re talking about the core consumer or the person on the street, the principle is the same: you have to come up with what the consumer wants, and you need a vehicle to understand it. To understand the rest of the pyramid, we do a lot of work at the grassroots level. We go to amateur sports events and spend time at gyms and tennis courts talking to people.

We make sure that the product is the same functionally, whether it’s for Michael Jordan or Joe American Public. We don’t just say Michael Jordan is going to wear it so therefore Joe American Public is going to wear it.

We knew the industry would get bigger. We had no idea ... we would compete as successfully as we have. It was all a labor of love in the early days and really to this day. It’s a fabulous industry, and the people who work out there, they love being in it. I mean, it’s sports, it’s fitness, it’s international.

Our business practices are no different than those of our competitors. But we are bigger, and thus more visible, so we get more flak. Basically what drives me is not money. I’m not in this for money anymore. I’ve got enough. What I want to do before I go to the great shoe factory in the sky is make this as good a company as I can make it. I simply have a basic belief that Americans don’t want to make shoes. That is not their ambition. They don’t want to make shoes. They don’t want those jobs.