The article explaining the Nike OUSTER

The Man Who Made Nike Uncool

Instead of transforming the sneaker giant into a high-tech behemoth, John Donahoe angered his partners and disappointed his fans.

Now that the news is out that Nike CEO John Donahoe is out, this is worth reading Business week feature from just a week ago. While the title may be a bit unfair, the story seems to paint a good picture of what happened here. And while it’s unlikely the story itself brought Donahoe down — as the piece notes, his contract was up in January and the cries for change had been brewing for some time — it certainly didn’t help matters.

At a high level, it seems like a case of bad fit mixed with a bad long-term strategic decision—one that initially looked brilliant: pivoting from a partner-based retail strategy to more direct e-commerce (leveraging Donahoe’s eBay expertise). The short-term revenue growth was impressive, but it ended in a bit of an anagnorisis situation—with Donahoe and Nike realizing that maybe they’d done exactly the wrong thing, too late. But that’s also easier to say in hindsight, since Donahoe also got the worst timing of all, taking over as CEO just before the pandemic hit and threw the entire world into a spin.

That said, the fact that he is being replaced by Elliot Hill is interesting. While all the press this week is noting that he “retired” from Nike in 2020, Bhasin and Meier are rather sober in their article that he stepped down immediately after Donahoe was appointed CEO. He has a fascinating background, started as an intern at Nike and found his way there after writing a paper on the company during college. While Donahoe served on the board for six years before being appointed, Hill worked at every level of the company for 32 years already. If anything, there shouldn’t be a problem with cultural fit this time around…

There are a few other passages from the article worth mentioning:

Donahoe was a dramatic departure from Mark Parker, his predecessor and the company’s current executive chairman, a respected sneaker designer who had risen through the ranks at Nike for decades. “Sometimes he finishes my thoughts before I even know I have them,” Knight once told the Portland Business JournalUnder Parker, a soft-spoken, intellectual man who seemed more comfortable spending hours testing sneaker cushioning in a research and development lab than giving a speech, Nike produced some of its biggest advancements, including its Flyknit manufacturing technology and HyperAdapt 1.0 self-lacing shoes.

As an outsider (again, aside from the fact that he was on the board), it would have been tough for Donahoe to…yes. But it would have been tougher to fill the shoes of Parker, who was a Nike guy through and through (and still serves as executive chairman). The only thing tougher would have been replacing Phil Knight himself—which William Perez had to do, coming from the chemical company SC Johnson & Sons Inc., no less. He was the last outsider brought in to lead Nike before Donahoe. He lasted barely a year.

Like Apple Inc., Nike was a master at making product breakthroughs and building cultural movements. Nike hired Donahoe to transform its sales machine for the modern era, cutting out the middlemen so it could squeeze better margins from every sale. He oversaw a global corporate purge, terminating relationships with more than half of its retail partners, ending hundreds of agreements and shrinking sales teams in markets around the world. While Nike directed customers to its own stores and websites, it halted the flow of sneakers to retailers like Amazon, Zappos, Dillard’s and Urban Outfitters, and even limited the merchandise at its closest U.S. partner, Foot Locker.

Donahoe’s strategy seemed to be working, until it wasn’t. That recently vacated shelf space was quickly filled by all of Nike’s top competitors: Adidas, New Balance, Puma, even Ugg. A flood of running-shoe brands, many of them newcomers like Brooks, Hoka, On and Salomon, suddenly gained exposure, eating into Nike’s market share in one of its most important categories. Meanwhile, the pace of product development at the company’s headquarters slowed as Donahoe took fewer risks with performance-oriented shoe lines across all sports.

These two paragraphs get to the heart of the strategic mistake that was made – and again, at first they seemed like the right moves. And they were the moves that Donahoe brought on board to execute. The internal dynamics that resulted from these changes only exacerbated the problems once the numbers started rolling in. Success can mask everything, but when it stops, all the warts come out.

It’s worth specifically mentioning the Apple element above, too. Everyone probably knows that Tim Cook is on the board and has been since 2005 – but he was also promoted to the role of lead independent director in 2016, when Knight formally took on an emeritus role (and then Parker became chairman and served as president and CEO). And he’s very close to Donahoe:

Apple CEO Tim Cook also became one of his most valuable confidants, advising him when eBay came under pressure from corporate raider Carl Icahn in 2014. Icahn wanted the company to spin off its payments business PayPal. Cook, who was struggling with his own activist headaches at Apple, advised Donahoe on how to deal with Icahn and members of the so-called PayPal Mafia, including Elon Musk, who sided with the activists. But Donahoe ultimately capitulated, leaving eBay after the spinoff. He kept busy with his board positions, including at PayPal and Intel Corp., and later rejoined the CEO ranks with a less glamorous job at enterprise cloud computing company ServiceNow Inc.

As an aside, being on Intel’s board at a time when all of their current headaches were bubbling up (he was there from 2009 to 2017) isn’t a great look either. And he seemed to have some attendance issues on that board…

Back to Cook: When Nike president Trevor Edwards, Parker’s heir apparent, stepped down in 2018 amid a #MeToo scandal at Nike, the company suddenly had to find a new replacement for Parker:

For years, Parker had tried to boost sales on Nike.com and get products to market faster. But it had become clear that Nike needed someone with more expertise if it was to grow its business by 28 percent and reach its lofty $50 billion annual revenue target. The board decided to launch a search for a new leader, since the best internal candidate had left. Donahoe, with his technical credentials and a decades-long relationship with Knight, came highly recommended by his colleagues on the board, especially lead independent director Cook, according to a person familiar with the discussions. Knight and Parker got on the phone and asked Donahoe if he would consider the job. Parker said he was particularly “delighted” by Donahoe’s “expertise in digital commerce, technology, global strategy and leadership.”

In other words, Cook was quite instrumental in getting Donahoe appointed CEO! And again, that seemed like a good move for a while given the strategy and yes, he sailed past that $50 billion revenue target.

Also note the push to “streamline” operations for an e-commerce world, which led to constant fears (rightly so) of layoffs and gave Donahoe an internal reputation that stemmed more from his Bain consulting days than his tech days. The really bad strategic decision to screw Foot Locker, long one of Nike’s most important partners. And just the general move away from the R&D and athletic culture that had worked so well for Nike from the beginning.

The whole thing is worth reading for the context here. And it culminates in last quarter’s earnings report, which saw the company’s stock plummet 20% in a single day, wiping out $28 billion in market value, their worst day ever. It’s worth noting that Nike’s next earnings report isn’t due for another 11 days. One can assume that those won’t look great either, or that Donahoe is at least playing out his contract. Or maybe they’re just fine and he can officially leave with a little swoosh before Hill takes over on October 14th.