JUST DID IT
With market capitalization over $100 billion, by any measure, Nike is one of the most lucrative companies in the world. So what traits allowed the company founder, Phil Knight, to grow his company from selling shoes out of the trunk of his car to one of the most well-respected companies of all-time? The answer is a never-say-die attitude, and by getting out there and Just. Doing. It.
The Early Days
Knight had run track at the University of Oregon and revered the team’s head-coach, Bill Bowerman with an admiration that bordered on the divine. Bowerman admired shoes. He was constantly modifying and perfecting the team’s footwear to make them lighter or faster. After graduating from Oregon, Knight attended Stanford’s Graduate School of Business where he wrote a paper entitled, ‘Can Japanese Sports Shoes Do to German Sports Shoes What Japanese Cameras Did to German Cameras?’.
At the time Adidas was the biggest name in the athletic shoe game. Knight’s idea was that the cheap, precisely made Japanese athletic shoes could be a viable rival the Adidas. So, in order to test this theory, instead of calling or writing, in typical Knight fashion, Knight boarded a plane and flew to Japan to learn more.
Just Doing It
At 24 years-old and without a dollar to his name, Knight cold-called one of the largest shoe manufacturers in Japan, the Onitsuka Company. He told them he wanted to be their sole distributor in US. When they asked what the name of his company was, all Knight could think of were the blue ribbons he’d won running track, and said, ‘Blue Ribbon’. A year later he received 15 pairs as samples and promptly sent 2 pairs to his old university coach Bowerman for approval. He gained more than approval, he gained a partner. On January 25, 1964, with nothing more than a handshake, Blue Ribbon was formed.
The Journey of a Thousand Miles
That first year, Knight drove to local track meets and sold shoes out of the trunk of his car. He managed to sell 1,300 pairs for $8,000. The following year, he doubled that selling $20,000 in shoes. In fact, sales would double every year for the next five years and by 1969, Blue Ribbon had sold over $150,000 worth of shoes. Even so after five years of steadily growing sales, Knight could still not afford to pay himself a salary. The company was cash poor.
By 1970, to keep the company growing at his current rate a $1 million loan was needed. This was an enormous amount of money for the time, so rather than comply, his bank told him his credit was maxed out. The company couldn’t even afford the $20,000 cost of shipment for the new order from Japan. Knight decided the best course of action was a small capital raise.
The Capital Raise
It was decided that Blue Ribbon would sell 20% at $2 a share in order to raise $300,000. One month after the offering, they had only sold 300 shares. And these were mostly to family and friends. At that point, the offer was withdrawn. Things were so bleak at that time, that at one point, Knight was forced accepted the last $8,000 one of his employee’s parents had saved, just to keep the company afloat. At the end of 1970, though sales were doubling annually, Onitsuka voiced dissatisfaction with Knight. By 1971, with over $1.3 million in sales and no cash on the books, Blue Ribbon’s bank terminated their relationship.
After finding another small line of credit at the Bank of California, Knight began talks with the Nissho Iwan Company, a Japanese trading company then doing more than $100 billion in sales annually. Nissho dealt in huge volumes, on loan, on margin, and loved growth companies with big upsides. For them, Blue Ribbon was a goldmine. It all seemed perfect. Better still, Nissho was willing to take a second position to the banks on Blue Ribbon’s loans. Nissho informed Knight there were many other shoe manufacturers in Japan, besides Onitsuka. But Knight was averse to ending his partnership. When Knight learned that Onitsuka was actively seeking outside US distribution however, he opted to buy a shoe manufacturing plant in Guadalajara that was once owned by Adidas. When Knight refused to sell Onitsuka the majority share of his company, Onitsuka nullified the distribution agreement. Knight was free to pursue this new company unfettered.
Birth of a Brand
In order to make this new company as a success, he would need a name and a logo. For $35, he paid a local college student Carolyn Davidson, to design a logo that conveyed ‘motion’. After three tries, she sent the iconic, ‘swoosh’. Not long after, a huge sample order was due and the name was needed. After weeks of debate, it was down to four choices: Falcon, Dimension 6 (which Knight really liked), Bengal, and Nike. The last name came to employee Jeff Johnson the night before in a dream. Reluctantly, because it was short, and because the winged God of victory appealed to him, Knight went with, Nike.
By late 1971, the company was still booming. But still needed cash. It was then that the decision was made to try another public offering. This time however it would be with convertible debentures. Debentures would incentivize investors to hold onto them for 5 years, after which they could convert them into common stock or received back the purchase price with interest. In June of 1971, they offered 200,000 debentures, at $1 each. This time the shares sold fast.
A Partner With Power
Now that it appeared Nissho would make a good business partner, Knight had to lay down some ground rules. Knight told them they would never receive equity in the company. Ever. Nissho agreed, but wanted a 4% mark-up off the top, and market interest rates after that. The deal was reached and soon Nissho paid off Blue Ribbon’s loan from the Bank of California in full. They also told the bank they would no longer do business with them at either of their locations as a result of the way they had treated Blue Ribbon in prior years. They then found Blue Ribbon a new bank that promptly opened a $1 million line of credit for them.
Sales continued to skyrocket. In 1976, Knight thought people might like a ‘waffle trainer’ (named for the shape of the sole) in blue to match their blue jeans. He was right. Sales exploded. Sales always exploded. Sales were not the problem. The problem was production. Demand was too high, and volume too low. They needed more manufacturing. They needed to move to a place with many readily available plants. That place was Taiwan. By 1976, Nike saw a boom in assets and inventory. And as is typically the case with any growth company, this put a further strain on cash reserves. Knight would not slow down. Grow or die was his attitude.
A U.S. Customs Disaster
In 1977, they received a bill for $25 million from U.S. Customs. It seemed their competitors had used a dirty trick to have this judgment leveled. At the time, duties on imported shoes were set at 20% of their manufacturing cost, unless a similar shoe was being manufactured by a company in the United States. If a similar shoe was being manufactured in the United States, the duty of the imported shoe would be 20% of that domestically made shoe’s sale price. Knowing this, several of Nike’s competitors decided to make shoes that were similar to the imported Nikes, then priced those shoes extremely high in order to send Nike’s import duty through the roof. The plan worked, and Nike was slapped with a retroactive tariff in the amount of $25 million – a fatal amount. Again, never one to sit around, Knight jumped on the first plane he could for DC. After getting nowhere with customs, he lobbied every senator he could find to tell him about his plight. Eventually, he came across a senator from his home state of Oregon, Mark Hatfield. Hatfield wanted to help and said he would do whatever he could. Eventually, the fee was reduced from $25 million to $9 million. Still a staggering sum, but survivable.
By 1980, Nike decided it had to be the first US shoe company into China. In order to sell shoes in China you didn’t apply, you had to ask to be invited to apply. To help with this process, Knight hired a savvy Chinese Princeton grad who knew the market well. In order to be allowed to sell anything there, they would need to manufacture there as well. This was a dream come true for Nike. China’s population had recently surpassed 1 billion people. 1 billion people meant 1 billion pairs of feet, which meant 2 billion shoes. Immediately again, Knight hopped on a plane to China. This time, he took his A-team to help with the sale. Two weeks later, the team secured a two factory deal and became the first US shoe company to crack the Chinese market.
A Public Offering
With sales from 1979 over $70 million, the day had come for the a public offering. This was an idea Knight had always been against because he never wanted to lose control of his company. But he needed the money. In order to alleviate both concerns, it was decided that they would issue two classes of stock: Class A, and Class B. Publicly available Class B stocks would receive one vote per share. Class A stocks were to be held by founders and early investors who would name ¾ of the board of directors. This would allow the company to raise enormous sums of money, turbo charging its growth, all while allowing Knight to retain control. It was decided that Nike would offer 20 million shares of Class A stock and 30 million shares of Class b. Of the 50 million shares, nearly 30 million would be held in reserve. That left 2 million Class B stocks to be sold to the public. The remaining 17 million Class A shares would be held by the insiders. This amount equaled 56% of the company. 46% of which would be held by Knight. The number was high but needed to be that way in order for the company to be run by a single voice.
Over the next 10 days, Knight and the team crisscrossed the country doing a dog-and-pony show for potential investors. They visited 12 cities in those 10 days. It was soon after that the price of the shares needed to be decided. Knight insisted on $22 per share. It was at the high end, but he rationalized it by saying there was another company going public that same week who was demanding $22 a share as well. And his company was better. That company was Apple. Knight received his price. The next day when the markets closed, Knight alone was worth $178 million. The IPO was so successful that even the $8,000 investment his employee’s parents had put in years ago was worth $1.6 million.
Today according to Forbes, Phil Knight’s net worth sits over $27.1 billion. For Knight however, it was never about the money. That was never why he got into it. At the close of his book Shoe Dog, Knight remarks, ‘When you make something, when you improve something, when you deliver something, when you add some new thing or service to the lives of strangers, making them happier, or healthier, or safer, or better, and when you do it all crisply, and efficiently, and smartly, the way everything should be done but so seldom is, you’re participating more fully in the whole grand human drama. More than simply alive, you’re helping others to live more fully. And if that’s business, all right, call me a businessman.’ On those terms, Phil Knight can truly be called one of the most successful businessmen of all-time. And he would never have gotten to where he is today without getting out there and Just Doing It.