How Data Drove Nike Into a Ditch

Is “data-driven” a panacea, or could it be the “Song of the Sirens”?

Every month, my Business Development Manager pitches ideas to me for topics for our monthly video and e-newsletter. This month, she pitched “data bias” and sold me! When it came time to select a specific subject for the e-newsletter, she combed through ideas she and I had recently squirreled away, and handed me an article – Nike’s $25B blunder shows us the limits of “data-driven” by Pavel Samsonov. She knew this would be like catnip to me – how a high-priced strategic consulting firm recommended Nike become “data-driven” and how Nike’s decision to implement this recommendation blew up in everyone’s face. As I read the article, I found the recommendation, decision, and implementation hard to believe. Yet, as she researched the story further and shared additional articles with me, more details emerged that revealed just how massive a blunder this was.

“Product Leader”

I've long marveled at both Nike's success and longevity – and I'm not alone in this. In early 1997, Michael Treacy and Fred Wiersema wrote an excellent book, The Discipline of Market Leaders, that outlines the three competitive strategies – or “disciplines” – a company can use to dominate a specific market. In fact, the authors’ three disciplines were a key part of my November 2007 e-newsletter, The Discipline of Alignment:

• Companies practicing Operational Excellence compete on low cost by emphasizing their supply, production, and distribution processes – Wal-Mart epitomizes such a company.
• Customer Intimate companies, such as Nordstrom, emphasize their customer selection, acquisition, retention, and growth processes.
• A Product Leader company, such as Nike, continually improves product performance by emphasizing processes to research, develop, and successfully launch new products.

According to the authors, companies need to be outstanding in one discipline – while performing reasonably well in the other two – if they hope to dominate a market.

Nike, founded in January 1964 by Bill Bowerman and Phil Knight, succeeded because it developed relationships with elite athletes to help its product development teams create cutting edge products used by these athletes, and to also help market the products they used in competition. Of course, Nike's best-known product, Air Jordan (released to the public in April 1985), was produced specifically for Michael Jordan during his first season with the Chicago Bulls.

The success of the Air Jordan product line allowed Nike to grow and continue to invest in its product development prowess. In an article published on September 13, 2024 (“The Man Who Made Nike Uncool”, referring to current Nike CEO John Donahoe), Bhasin and Lily Meier recount some of the company's legendary contributions to sports technology:

Over the years, Nike has been responsible for game-changing technology, such as its Air cushioning system, Alphafly marathon runners and ISPA eco-friendly methods and materials. Flyknit’s lightweight fibers have been integrated into many of Nike’s product lines, and its Dri-FIT fabric is used in virtually every type of clothing. One of the few new products [current CEO John] Donahoe could point to was the Air Max Dn, with a footwear cushioning system built off its Air technology.

Two paragraphs from this same article help explain why John Donahoe – a former CEO of both Bain and eBay, and someone notably lacking footwear and apparel experience – was hired as CEO:

Like Apple Inc., Nike was masterful at making product breakthroughs and engineering cultural movements along with them. Nike hired Donahoe to transform its selling machinery for the modern age, cutting out middlemen so it could get better margins from each sale. He led a corporate culling on a global scale, ending relationships with more than half of his retail partners, terminating hundreds of agreements and downsizing sales teams in markets around the world. As Nike directed customers to its own stores and websites, it halted the flow of sneakers to retailers including Amazon, Zappos, Dillard’s and Urban Outfitters, and even curtailed goods at its closest partner in the US, Foot Locker.

For years, [prior CEO Mark] Parker had tried to boost sales on Nike.com and get products to market faster. But it had become evident that Nike would need someone with deeper expertise if it wanted to expand its business 28% and reach its sky-high annual revenue goal of $50 billion. The board decided to search for a new leader, since its top internal candidate was gone. Donahoe, with his tech bona fides and a decades-long relationship with [Nike co-founder Phil] Knight, came highly recommended by his peers on the board—especially lead independent director [current Apple CEO Tim] Cook, according to a person familiar with the discussions. Knight and Parker called and asked Donahoe if he would consider the job. Parker said he was especially “delighted” with Donahoe’s “expertise in digital commerce, technology, global strategy and leadership.”

Thus, the new CEO came in with directives to boost sales on Nike.com – a “direct-to-consumer” channel – and get new products to market faster. The way he did this would ultimately prove disastrous.

Based on my readings, and my 35 years of experience in helping companies fix problems and improve results, Nike seems to have made two major mistakes.

Major Mistake 1 – Pivot to “Data-Driven” and “Direct-To-Consumer” (DTC)

The Pavel Samsonov article I cited at the beginning of this e-newsletter includes these two excellent paragraphs:

On the advice of McKinsey, Nike’s new CEO John Donahoe decided to pivot to a “data-driven” approach, reorganizing the company towards digital direct-to-consumer sales and eliminating the former model centered on distinct categories. The allure is easy to recognize, and it’s the same trap that Boeing and other companies fell into over the preceding years.

Coming up with new ideas is difficult and requires specialist knowledge. Moreover, it requires specialist knowledge to understand what those specialists are doing and therefore manage them.

Nike succeeded not only because of relationships with elite athletes – it also succeeded by developing strong relationships with a wide variety of retailers to actually sell its products. Nike geared its marketing, frequently featuring the athletes in its stable, to consumers, thereby helping drive business to its retail partners.

With a new emphasis to grow sales on Nike.com, Nike ended relationships with long-time retail partners. Nike leadership lost sight of the numerous ways products can “Go To Market” and how these various channels – having different levels of profitability – work to reinforce each other. Of course, retailers need their shelves filled with products to sell, so other shoe and apparel companies quickly took over valuable shelf space previously occupied by Nike.

Major Mistake 2 – Eliminating Specialists in New Product Development

As someone who has worked closely with many manufacturing companies, and helping one market leader successfully overhaul its product development process, I know firsthand the many personnel and specialized skills required to successfully develop new products.

• Brand Manager – This person faces outward to both customers and consumers, soliciting feedback on what products might sell better or could better meet consumer needs – and then analyzes customer sales data and consumer feedback. The Brand Manager develops a new product brief describing both the creative aspects and the cost and selling price goals for a new product.
• Product Designer – This person is very creative and wants to produce a distinctive new product, yet knows enough about the manufacturing process to understand what can and cannot be done.
• Product Development Specialist – This position requires both creative and technical skills, and is held by a person who understands the manufacturing process and is tasked with working with the Product Designer to tweak the product design so it is feasible to make at the required cost and selling price.
• Product Development Technician – This person has intimate knowledge of the materials, equipment, and technicians used in the manufacturing process. After directing the creation of specs and patterns needed to actually make a product, this person oversees the production of the prototypes.

This is a complicated process, where experience, specialized knowledge, and the ability to work collaboratively as a group are key requirements.

Perhaps you believe this process and these specialized persons are needed only if your company makes a product? You'd be wrong, because even companies that outsource manufacturing, such as Nike, need to design products having certain traits that appeal to a certain market segment and that can be made at a target cost to hit a particular sales price.

Nike also started making new product development decisions based on data showing what was popular on Nike.com – as opposed to elite athletes telling product experts the features they needed to improve their performance.

Through a combination of retirements and layoffs, Nike eliminated many of the highly specialized positions I described, to the point where its new product development atrophied. This worked for a while, until sales of consumer-driven products on Nike.com stalled. When it needed new products to introduce, Nike had little in its product development pipeline.

Reading the Data Incorrectly

At some point, data must have been marshaled to support the major strategic decisions to move to a direct-to-consumer sales model and to develop new products based on data from Nike.com. I'm not sure what data was included in presentation decks, though I suspect it included profitability by channel.

Depending on how Nike's overhead costs – which included New Product Development – were allocated to channels and products, the DTC channel via Nike.com could have looked much more profitable than other channels.

That's the rub with cost allocations – the costs allocated to various channels and products depend on who analyzes the costs.

• If a consultant from, say, a major strategy consulting firm analyzes and allocates costs, that person likely does not fully understand how various products and channels reinforce each other. This could result in Nike.com looking more profitable than it should.
• If a cost accountant having extensive industry experience did the allocations, they would probably develop a more nuanced allocation approach, so that Nike.com would receive a more equitable share of costs.

What’s the value of extensive industry experience? It allows a person to see more linkages and relationships among the people, process, and technology used to successfully develop new products and profitably bring them to market in a particular industry. The story told by these linkages and relationships is what Nora Bateson calls “Warm Data.”

‘Warm data’ is a concept developed by Nora Bateson in an attempt to improve the ways in which conventional forms of statistical data can be used to address issues within complex social systems. The term is a response to the rise of ‘Big Data’ and the increasing credence now being given to analysis of aggregated data that has been taken out of context. In contrast, ‘warm data’ is other information that needs to accompany any bald statistical analysis.

As such, ‘warm data’ reminds us that analysis of statistical data taken out of context can never fully correspond with the complexity of any ‘living system’ – from an individual school through to our whole-planet ecology. Thus, the idea of warm data raises the idea of complementing decontextualized official ‘data’ with a nest of other information that can give a sense of how any system is functioning in terms of its broader relationships and interdependencies.

There's an old saying among accountants – “Figures don't lie, but liars figure.” I'm not accusing anyone at Nike or McKinsey of being liars – however, an analysis based solely on cold data will tell a less accurate story than an analysis where the cold data has been analyzed, interpreted, and explained by someone with knowledge of the related warm data.

If a company is going to be data-driven, then executives and managers need to ensure decisions are made using a complete and accurate interpretation of the data.

Value Destruction

The upshot of all these mistakes? Here's my summary from a July 28, 2024 article, “Nike: An Epic Saga of Value Destruction,” by Massimo Giunco, a former Senior Brand Director of Nike.

• $25 billion of market capitalization lost on June 28, 2024, when Nike reported its 2024 Second Quarter results.
• $70 billion of market capitalization lost in 9 months.
• The lowest share price since 2018.
• Share price down 32% since the beginning of 2024.

By any measure, the decision to move to a direct-to-consumer sales model and to develop new products based on data from Nike.com was a disaster.

On September 20, 2024, Fortune reported that Nike stock reached a high for 2024, as the market reacted to Nike naming Elliot Hill, who retired as the Nike's head of commercial and marketing operations in 2020, as its new CEO. He will replace John Donahoe – who joined Nike as its CEO in January 2020 – in October 2024.

Moral of the Story

I see more than one moral in this story.

• Nike Changed Its Competitive Strategy – The cumulative effect of Nike's two major mistakes was to change its competitive edge from Product Leader to Operational Excellence. In other words, Nike tried to become a "direct-to-consumer" version of Wal-Mart, and failed.
• Nike Changed Its Secret Sauce – For decades under Phil Knight’s leadership, Nike invested at least 10% of its revenue into demand creation and sports marketing. While Nike does not disclose how much of its Operating Overhead Expense is dedicated to research and development, a 2017 article reported that “Morgan Stanley estimates Nike spent ‘~$2.5 billion on research and development in the last five years.’” – or about $500 million a year. Clearly, Phil Knight understood demand creation and new product development comprised Nike's “Secret Sauce.”
• Nike Didn't Let Its Data Tell an Accurate Story – It seems Nike made its strategic decisions based exclusively on “cold data” without using “warm data” to provide a different viewpoint.

Imagine the many decades Nike invested in research, products, athletes, sponsorships, product placements, distribution channels, and its internal processes to build its reputation to such a height it would be cited as THE exemplar of “Product Leader.” It amazes me how much of this investment was flushed down the drain within four years of implementing such a colossal avalanche of avoidable – and foreseeable – mistakes.

Sincerely,

Todd L. Herman

PS – Take a look at our most recent video on Data Bias.