Once Trusted, Then Ousted: Customers Have Fired Nike's CEO
Once Trusted, Then Ousted: Customers Have Fired Nike's CEO
What strategic lessons can we learn from John Donahoe’s dismissal?
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“June 28th, 2024. Nike Q2 24 financial results. 25bn of market cap lost in a day (70 in 9 months). 130 million shares exchanged in the stock market (13 times the average number of daily transactions). The lowest share price since 2018, - 32% since the beginning of 2024. It was the judgment day for Nike.” (source).
That day, Nike had its worst day in the stock market since going public in 1980. On September 19, Nike Inc. announced that John Donahoe, the company's CEO, was ousted.
Nike’s board of directors terminated the contract with Donahoe, but it didn’t sack the CEO; customers did.
They stopped buying Nike's sneakers. They stopped boasting about them on social media. They pulled out of the value exchange. It hurt Nike’s numbers, and the board just did what it had to do.
What strategic lessons can we learn from the story?
All links to sources I used to write the article are cited at the end of the article.
Founded by Runners, Undermined by a Consultant
Nike, originally known as Blue Ribbon Sports, was founded by University of Oregon track athlete Phil Knight and his coach, Bill Bowerman, in 1964.
It is important here that both founders were athletes. They had been customers before they became manufacturers. They knew what a pair of good sneakers meant to a sportsperson.
John Donahoe is a former basketball player. But, apparently, his passion for cost-cutting and online sales, which he developed while working for Bain and eBay, outweighed his love for sports.
Every company must create value for six stakeholder groups:
· Customers
· Employees
· Shareholders
· Business partners
· Regulators and watchdogs
· Society
A CEO’s job is to:
1. Deeply understand the needs of all stakeholder groups
2. Strike a balance among the conflicting interests of all six groups
3. Manage the Value Waves, or critical business processes, in a way that maximizes the value the company delivers to the stakeholders.
If a CEO fails to complete the first task, they shouldn’t even bother starting the next two.
I’ve never worked for Nike or with Nike, but from what I’ve learned about the situation, I can conclude that John Donahoe fell short in addressing the issue.
In hindsight, it is easy to criticize Donahoe for his decisions. Today, it's obvious that many of them were wrong.
But he made them in mid-2020, when the world was overwhelmed by the lockdowns, and no one had a clue what tomorrow would bring. So, my goal is not to blame Donahoe but to articulate the lessons we can learn from the case.
Ten mistakes the Nike’s CEO made
1. Nike began to sell the Panda Dunk model on a large scale. Before that, only a few consumers could buy it, which created the effect of scarcity and exclusivity.
Within a few years, Pandas were relentlessly mocked. Complex magazine wrote that they’d become “a cultural signifier that someone is new into sneakers or just doesn’t care about them all that much.”
Takeaway:
Nike ignored the interests of buyers who wanted to be part of an elite club. It also put short-term shareholder interests, or today’s profits, ahead of long-term strategic success.
2. Nike released more lifestyle models like Dunks, Air Force 1s, and Air Jordan 1s, developed around 40 years ago in hundreds of colors, with new drops almost daily.
But it didn’t release enough models for athletes who’ve driven Nike’s business for decades. Focus on streetwear generated huge revenue but undermined the brand’s identity. Athletes who used to be loyal to the company for decades switched to other brands.
Takeaway:
A CEO should never sacrifice long-term relations with key customers for the sake of short-term financial results. There are six equal stakeholder groups, but Nike’s shareholders were much happier than customers at the time.
3. Nike switched from brand building to direct sales. A former Nike marketing executive, Massimo Giunco, describes it this way in his LinkedIn article:
“The CMO of that time made a few epic moves:
a) shift from CREATE DEMAND to SERVE AND RETAIN DEMAND, that meant that most of the investment were directed to those who were already Nike consumers (or “members”).
b) As of 2021, to drive traffic to Nike.com, Nike started investing in programmatic advertazing and performance marketing the double or more of the share of resources usually invested in the other brand activities.”
Takeaway:
Customers don't just want to buy a pair of sneakers. They want to be part of a community, and every great brand gives it to them. However, Nike was focused on sales, not on branding. Customer interests were ignored.
4. Nike made too big a bet on the loyalty program.
Massimo Giunco argues: “Obviously, the former CMO had decided to ignore “How Brands Grow” by Byron Sharp... Otherwise, he would have known that: 1) if you focus on existing consumers, you won’t grow. Eventually, your business will shrink (as it is “surprisingly” happening right now). 2) Loyalty is not a growth driver. 3) Loyalty is a function of penetration. If you grow market penetration and market share, you grow loyalty (and usually revenues). 4) If you try to grow only loyalty (and LTV) of existing consumers, you don’t grow penetration and market share (and therefore revenues). As simple as that…”
Takeaway:
One more example of short-termism. After all, no one needs twenty pairs of sneakers.
5. Nike began to cut out middlemen by ending relationships with more than half of its retail partners. Donahoe, with his digital background, believed in direct-to-customer, or DTC. Why do you need a retail partner if you have a website and a mobile app?
Donahoe’s strategic goal was ambitious. Nike was supposed to receive 50% of its revenue through direct online channels. It never happened. DTC sales jumped to almost $9 billion in 2023, but that was less than a quarter of the company’s total revenue.
Consumers who returned to brick-and-mortar stores and didn’t find Nike’s products on the shelves switched to other brands.
Takeaway:
Never underestimate your business partners. They are very important stakeholders. Never overestimate your customers' loyalty.
6. Donahoe lost the employees’ trust. A quote from Bloomberg: “He’s lost the community at Nike,” says Travis Gonzolez, Nike’s former director of client relationship and communication, who was laid off by the company in May 2024.”
Takeaway:
Never lose the trust of your employees. If your business is in trouble, they are the only ones who can save you.
Check out my book Red and Yellow Strategies: Flip Your Strategic Thinking and Overcome Short-termism.
7. Donahoe eliminated categories. In his new strategy, products were no longer organized by sport, but by gender.
Massimo Giunco states: “In 6 months, hundreds of colleagues were fired and together with them Nike lost a solid process and thousands of years of experience and expertise in running, football, basketball, fitness, training, sportwear, etc., built in decades of footwear leadership (and apparel too).”
In 2024, categories were reintroduced under a new name, “Fields of Play.”
Takeaway:
Category leaders understand your primary stakeholders, customers, better than anyone else. Take good care of them.
8. Nike missed the boom in running culture.
There are many running clubs and groups in the USA. The Wall Street Journal reports that many sneaker brands, except Nike, use these groups to introduce their products.
Takeaway:
Go to your customers. Talk to them. Find the places where they like to be.
The price of the program Fast-Track Strategy: Craft Your Strategy In a Few Simple Steps will increase by 20% on October 7. Don’t miss your chance to buy it!
9. Nike relied too much on data. On the advice of McKinsey, Nike’s CEO pivoted to a “data-driven” approach.
But there are two critical problems with data:
1. It tells you nothing about your non-customers, those who don't visit your website, don't install your app, and don't buy your products.
2. Data can tell you WHAT your customers do or don’t do, but it fails to explain WHY they do it.
Data isn’t a mirror of the real world, it’s only its shadow.
Takeaway:
Never rely only on data. Go to customers and talk to them.
10. In December 2023, the company cut its revenue forecast. As Bloomberg puts it, Donahoe 'shifted into Bain mode' and unveiled a plan to cut $2 billion in costs, including getting rid of 2% of the workforce.
Takeaway:
Sometimes, cutting costs is the best solution. But we should remember that it never helps you create more value for consumers.
Conclusion
Every company must create value for six stakeholder groups. It can be very challenging, and at times it feels like juggling several objects of different weights and sizes. But that’s the job of a CEO.
In the 2010s, Nike remained loyal to its customers but came under fire from public outrage due to the questionable manufacturing practices of its partners in Asia. Today, society has no claims against Nike, but the same can't be said for its customers and shareholders. Business leaders must always keep the interests of all six stakeholder groups in mind.
Read also: Stay Ahead of the Curve: Glimpse Into the Future of Your Industry
Check out my second newsletter, Strategy in Three Minutes.
Check out an interesting newsletter on Substack I’ve found recently.
Sources:
Nike’s $25B blunder shows us the limits of “data-driven”
Nike: An Epic Saga of Value Destruction
Nike Reverses Course as Innovation Stalls and Rivals Gain Ground
How Nike Missed the Boom in Running Culture
The Man Who Made Nike Uncool (according to Bloomberg’s rules, this link will be free only till the 6th of October, 2024).
I agree with all points, but I think there's a more profound strategic lesson here. It’s about optionality.
Donahue is a pretty smart guy, if not a shoehead. But he bet too much, too far in a single direction, and when that proved to be a mistake, he had destroyed his ability to course correct. He destroyed his optionality.
I remember reading “The Strategy Paradox” and making the same point: that some so-called great strategies of the past are not at all, but just huge bets that turned out to be correct. Perhaps the strategist in question did have a greater foresight than his opponents! Or maybe he just got lucky. It’s difficult to affirm.
If Donahue had been right, we’d have hailed him as a genius. He was wrong, so he got fired. C’est la vie.
But a great strategist knows how to avoid uncertain bets. He builds optionality and the ability to pound on opportunities. As Sun Tzu already knew:
"The Skilful Warrior
Exploits
The potential energy;
He does not hold his men
Responsible.
He deploys his men
To their best
But relies on
The potential energy."
(Sun Tzu, The Art of War)
Lots of good lessons here.
Many companies start committed to bringing something amazing to customers. Then they focus on manufacturing and distribution. Then they become obsessed with financials. Next it’s efficiency. Now they’re along way from where they started.