The CEO of a legendary American company steps down after a series of reverses. His company used to dominate its industry, was the leader in innovation, and succeeded so massively that it became an icon of American success. Despite this track record, it had turned to an outsider with a financial background, but no experience in, or passion for, the industry when it hired him. The new CEO focused on cost-cutting and squeezing profits from older products instead of making the investments necessary to invent new ones. The result was a spike in short-term profits that thrilled Wall Street but was soon followed by a precipitous decline as customers turned to competitors who had new and innovative offerings. The outsider CEO, after receiving tens of millions of dollars for destroying tens of billions of dollars in value, retires, leaving a successor to pick up the pieces.
Is this the story of Nike? Or Boeing? The answer, of course, is both (and they’re hardly the only examples – you could swap Intel in, for example). I have been writing repeatedly about Boeing’s failures for the last 10 years. It’s not because I’m obsessed by airplanes (although I am). It’s because Boeing is the perfect example of what’s gone wrong with the American economy since 1980. For two generations, American companies have been run to maximize short-term financial returns instead of to produce great products. In the long run, this approach fails disastrously at both. Jack Welch was perhaps the most influential, and most destructive, advocate of this approach, as described by New York Times reporter David Gelles in his superb biography of Welch, The Man Who Broke Capitalism.
Nike has just provided us with another case study. Because the product life cycle in fashion is much faster than it is in airplanes, it took only years, instead of generations, to cripple a great company. When John Donahoe became the CEO of Nike in 2020, he was the company’s second-ever outsider CEO. Donahoe had been the CEO of eBay and Bain but – critically – he had no history in shoes, or sporting goods, or even in fashion. Even two years after becoming CEO of Nike, he knew so little about sneakers that he “embarrassingly referred to Nike’s proprietary ZoomX foam – developed a decade ago from materials traditionally used in the aerospace industry and critical to the company’s running shoes – as the ‘Zoom 10.’”
Donahoe slashed sales teams and R&D and shifted products from Nike’s retail partners to its own stores. Unsurprisingly, this boosted numbers in the short term. Soon after he took over as CEO, Nike struck gold when it revived a low-top sneaker from the 1980s in a black and white color scheme. The “Panda dunk,” as it came to be known, was an enormous hit, and Nike capitalized on it by releasing model after model – until they became so ubiquitous that sneaker culture inevitably turned against them, so much so that at a sneaker convention in 2023 they were chosen as “the worst sneaker of all time.”
Donahoe’s reorganization of Nike followed a similar trajectory. He laid off hundreds of marketers who had an intimate knowledge of Nike’s customers, intending to replace them with data driven insights. Product creation shifted from sports to demographics (instead of a department focused on creating products for basketball, it would have one creating products for men, “like Zara, GAP, H&M or any other generic fashion brand).” His shift from wholesale marketing through retailers to direct sales through Nike stores yielded market share to competitors who used their new presence to establish themselves as peers to the legendary swoosh. The result was, in the words of former Nike branding executive Massimo Giunco, that “for the first time in Nike history, long term vision wasn’t about sustainable growth anymore…it was about the supremacy of DTC, led by digital. Period.” Unsurprisingly to anyone who knew the shoe market, but shockingly to Nike’s new leadership, “[m]any consumers – mainly occasional buyers – did not follow Nike…but continued shopping where they were shopping before the…So, once they could not find Nike sneakers in ‘their’ stores – because Nike wasn’t serving those stores any longer -, they simply opted for other brands.”
Nike’s financial performance soon became so bad that on June 28 the release of Nike’s earnings report triggered a slide of 20% in the company’s stock price in a single day – the worst day for its stock since Nike’s IPO in 1980. Donahoe, inevitably, responded with layoffs. There were, after all, no innovative new products that could turn the tide. Perhaps worst of all, Nike’s powerful aura of cool, the one that made it inseparable in the public mind from athletes like Michael Jordan and LeBron James, was so shattered that GQ asked, “Is Nike Still Cool?” The article made it clear that the answer was no.
On September 19th Nike’s Board finally stepped in. Wisely, they decided to return to Nike’s roots and bring back Elliott Hill, who started his career at Nike as an intern in 1988 and spent 32 years there before retiring in 2020. As Peter Drucker, the greatest of all management thinkers said, “the purpose of business is to create and keep a customer.” And the way you create customers is by creating great products. When you do that, the profits will come. Nike will be Nike again when its leaders keep in mind that their job isn’t making numbers – it’s making shoes.